Visualizing How A Bitcoin Transaction Works

Tyler Durden's picture

Following our last primer on the digital currency, prices have somewhat stabilized (despite the ongoing efforts of TPTB to regulate it out of existence). The following infographic provides a step-by-step illustration of how a bitcoin transaction occurs.



(click image for legible large version)


(h/t Dr. Constantin Gurdgiev via True Economics blog)

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Alpo for Granny's picture

Granny needs Alpo.

Bob has Alpo to sell her.

Granny hands Bob some mercury dimes.

Bob hands Granny the Alpo.

The End.

Dr. Engali's picture

Granny keep your Mercury dimes for now and give them the shitty copper/nickel dimes. Save your Mercury dimes for the Fancy Feast.


Doc- I believe you are referencing Gresham's law here.  Nailed it.'s_law

TwoShortPlanks's picture

I've just realised what BitCoin is missing, this:, along with Central Banks too, I might add.

MBS = Over The Counter Synthetic Derivative

BitCoin = Under The Counter Synthetic Derivative

SafelyGraze's picture

and here is How A Bill Becomes A Law!

next week: How A Life Form Becomes Patented!

How War Is Declared!

How Government Contracts Are Awarded!

How A Check Is Cleared!

Lore's picture

Re: "Bob, an online merchant, decides to begin accepting bitcoins as payment. Alice, a buyer, has bitcoins and wants to purchase merchandise from Bob." 


"Bob, a global warming pusher, decides to begin accepting carbon tribute. Alice, a sucker, has money and wants to buy carbon offsets from Bob."

francis_sawyer's picture

Where's the part in that flow description where the IRS takes it's cut?

clymer's picture

Look ZH, I love how BC uses 256bit PKI with salted hash to regulate and restrict the number of coins mined. I love how buyers and sellers can agree on it as a medium of exchange to work together without 3rd party interference. I get it. But here's the thing that prevents me from biting: it ain't backed by anything. And what the fuck is Keiser talking about when he says there will never be a competitor to bitcoin? Here's a novel idea: Anonymous puts a little time into understanding as much about banking and finance as they understand about scientology. As this understanding spreads between their more entrepreneurial members, say an offshoot, sub group that happens to work in certificate / key store management, they develop a similar algorithm, only they say, "look, we developed a similar model called 'crypto coin' won't just allow this to denominate in fiat that the 'cryptocoin' marketplace will back, we will tie specifically to gold and silver. The algo will ultimately mine 15x more silver colored cryptocoins than th gold colored ones, to represent what exists naturally in the crust of the earth. They then correspondingly create their own exchange (even say a virtual exchange represented by members), collectively owned by all cryptocoin holders. The balance of actual metal in the exchange is verified on a quarterly basis by the top 100 cryptocoin holders to verify that they maintain the same amount of precious metals in the exchange, as there exists cryptocoins in circulation. The crypto coins can then be redeemed in gold and / or silver. The same concept could be applied to oil contracts, shares in organic beef farms, or stock at company xyz. Till I see the next evolution cryptographic digital currency, I will keep hitting the coin shop and stacking. 

Intrinsic value is one thing. Tangible value is another. Combining the two is key

Observation: The bitcoin buyers / holders appear to be vitriolic toward those that prefer PM's. Understand that we are on the same side of this argument. Don't lose sight of the bigger picture; that we all now recognize how the monopolized private issuance of currency and credit has led us to this point

13thWarrior's picture

So bigger printer will be replaced by bigger mining computer?

MeelionDollerBogus's picture

Indeed. Those with the most powerful computers, bought with fiat that can be printed by central banker allies, would be able to mine more btc than anyone else. Simultaneously they would be able to print endless fiat to purchase btc to control those already mined. Worse still these central bankers control all bank regulations so all accounts for fiat used for exchanges like Mt.Gox can all be shut down using those regulations.

My what a pretty picture that is.

The Mist's picture

That's exactly the arguement I make when it comes to BitCoin. The idea can fairly easily be copied and the markets might be flooded with these Crypto Currencies

Matt's picture

There are hundreds of paper monies in the world, but everyone prefers USD. 

French Frog's picture

Modifying a Verified Bitcoin Transaction ---> "Such a feat is nearly impossible".

I always worry when I see 'nearly' !

MeelionDollerBogus's picture

not me.

In fact if you've watched the Amazing race in the last year you'll see contestants frequently failed to carry local currency, brandished USD, and were threatened with ARREST for owing for things like a taxi and having NO MONEY to pay with. FREQUENTLY.

LostAtSea's picture

clymer, it could be argued that since the total number of bitcoins that will ever exist is 21 million, and the total gold produced (so far) from the Earth is 5.5 Billion troy onces, then there already exists a relationship between gold and bitcoin:  5.5 B oz Au/21 M BTC = 262 oz/bitcoin.  Therefore it could be argued that each bitcoin could be worth 262 oz Au, or about $375K/bitcoin at current gold prices.

Regarding a slver equivalent, there is already Litecoin. 

I hear your argument about other crypto currencies could be invented, and some already do exist.  This is one threat to the to whole concept.  But I guess it really comes down to faith in the system, as is so with any monetary instrument.  Thus far, Bitcoin has the most faith and popularity, kind of like the US Dollar (used to) have.


Go Tribe's picture

The person with the last roll of Eagles will rule the world.

Urban Redneck's picture

Last time I checked - sausage was made with either sheeple intestines or soylent greenbacks, and it doesn't look like anything has changed.

flacon's picture

I love how bitcoin is always represented as a PHYSICAL COIN.(usually gold or silver) LOL!

RideTheWalrus's picture

It's a precursor to 'BitCoins 4 Gold' stalls at the mall - associate programming.


macholatte's picture


Bitcoins 4 Fiat


I got widgets to sell at $199 USD. Presumably there is a way to make change with Bitcoin using fractional reserve Bitcoinage. But what about the sales tax? Now my $199 item is $214.50 (That's right, I ain't ready to mess with the tax man), so I will need to pay the State with Bitcoins or change them back to fiat. But say the value of the Bitcoins tanks between the time I collect and when I have to pay the tax man. I guess I get screwed.

Sooner or later, the electrons get converted into paper.

Ignatius's picture

If I gave you 10 BTC would you take 'em or toss 'em?

If you'd take 'em, they have value.

TwoShortPlanks's picture

I would gladly take them, then I'd sell them as fast as possible to the Greater Fool. Then buy physical.

Funny, this sounds familiar......China!

Ignatius's picture

Right!  They have exchange value.

TwoShortPlanks's picture

Yes, like Fiat. Just buy real PMs.

Ignatius's picture

Yes, when the goal is to store value.

Gold = wealth reserve asset

Lore's picture

When my local grocer prefers bitcoins, THEN I'll take them seriously.  Until then, they're no more useful as currency than baseball cards, points programs or pogs.

wintermute's picture

Ha Ha Ha. By the time your grocer accepts them they will exchange at $10k per USD. You will be kicking yourself silly that you read about them on ZH and did nothing except slam them.

Blano's picture

Unless you're buying 10k in groceries, why would the grocer take it?  How does he make change?  Too damn complicated.

Matt's picture

Unless you're buying $1500 in groceries, why would you own gold?

You understand that bitcoins are divisible, right? Just like how a kilogram of gold can be divided into grams, or a dollar can be broken into cents?

Saro's picture

Do you think your local grocer will routinely accept gold bullion before or after they routinely accept bitcoins?

I'm betting bitcoin adoption comes first.

Lore's picture

I don't think. I KNOW. Thanks for playing.

(Hint removed for protection of third parties)

MeelionDollerBogus's picture

I'll take the opposite bet.

lickspitler's picture

it ain't gold

it ain't silver

it ain't ammo

it ain't pussy

bitcoins... who cares

SpykerSpeed's picture

It's represented that way so that simpletons like yourself can comprehend it.  In reality, Bitcoin is a shared ledger that is validated with a proof of work chain and secured with SHA 256 bit encryption.  But that flies over the head of goldbugs.  And the subjective theory of value is completely lost on you guys, too.  You think that in order for something to have value, it must be shiny and physical.

Pure Evil's picture

No, just something that will continue to exist after I've either forgotten or lost my encryption key.

(ok, it'll still exist in the ether, until the grid goes down, and like gold lost in a boating accident, it doesn't do anyone any good if you can't access either your bitcoins or your gold.)

All Out Of Bubblegum's picture

So if you forget where you put your wallet or lose a benjamin, you don't like cash either?

Sounds like you're really limited in how you can move and manage funds. Sorry to hear that. I make silver doing the (fiat > silver > bitcoin > fiat) loop.

You should check out the 21st century sometime, Mr. Evil.

RideTheWalrus's picture

I make silver doing the (fiat > silver > bitcoin > fiat) loop.

Just be careful that hot potato doesn't become cold spaghetti

francis_sawyer's picture

The IRS is very interested in your disclosure, & proud of your achievements...

Pure Evil's picture

Mr. Bubblehead, um bubblegum, I can afford to lose my wallet, don't carry a crapload of cash, but if I were to exchange 10K USD for bitcoin and lost or forgot my key, then I'd be shit out of luck.

Truth is, there's risk in every thing a person does. Never know if today is your last day on planet Abnormal.

Plus, it sounds like you lead a complicated life just to cycle fiat back to fiat. Let's see the number of steps. From fiat to silver to bitcoin all the way back to fiat.

Yep, that's so 21st century of you. You should get a job at Goldman Sucks with that type of skill.

Saro's picture

What if your gold continues to exist in the pockets of the thieves who take it from you?

With bitcoin, it is literally possible to keep the keys to your account completely in your head and nowhere else.  That's never been done before, to my knowledge.

Row Well Number 41's picture

Notes on Bitcoin:

Anybody who studied with Dave and Charlie in the late 90s knows, it is always easier to encrypt data then to decrypt it. Even if some government, don't think the US is the only one working on it, has the ablility to decrypt the data, it will always require a focused effort, and they won't be doing it realtime. In addition, more robust encryption alogrithms can always be written. So I don't worry to much about it being tracked or hacked.

Bitcoin is the ultimate fiat currency. It is backed by nothing except faith in the software and hardware infrastructure it is based on. That said, the software infrastructure is completely opensource, effectively transparent, can't say that about the FRN, Euro, Yen, or Yuan, other Central Bank currencies.

If you're holding for the long term, Bitcoin is like a startup, a high risk high return speculation on what you believe is a good idea, not a bad thing. It is not a safe long term store of value, if for no other reason then the infrastructure that supports it has not been stress tested. The "Web" as we know it is only 20 years old, the internet itself is only 60. This is a flash in the pan compared with Gold, Silver, or even traditional CB fiat. It hasn't even seen it's first total war situation.

All digital money is fiat, and it has its place, I don't want to have to go and pay my power bill in person with silver dollars. So as digital fiat, I see Bitcoin as an interesting alternative to CB Fiat. It is not beholden to bankers, or politicans, and its intergity is enforced by the open source nature of the software. However, I will not be cashing out my physical for Bitcoins, though I might speculate a little.


MeelionDollerBogus's picture

Crypto-geeks also know that computing power with Moore's law is something not to be dismissed which is why keys need to expire, and newer keys need to be BIGGER and data itself can't just live forever, just live long enough undisturbed to be useful. This means eventually BTC wallets will need to expire.

thisandthat's picture

It takes a mere 8 lines of perl to decode sha160 - how long until 12 lines of perl decode sha256?

Saro's picture

292 times harder?

Yeah, good luck with that.

LostAtSea's picture

thisandthat: is that a brute-force algorithm?

if so....assuming each line of code executes in *one* assembly instruction (highly unlikely), and is executing each one at 2 Ghz, it would take about 9^37 YEARS to decode sha160.

MeelionDollerBogus's picture

That’s a pretty poor assumption. I’d more likely assume that many GPU units would be farmed out, perhaps over a network as well, to simultaneously compute many 8 ghz attempts all at once. You know NVIDIA makes a 128 core gpu STRICTLY for this purpose? Just ONE card. Now imagine 3 per machine with 100 machines farmed out. It could instead be MILLIONS of machines. EACH with a dozen GPU cards EACH with 128 or more cores.

thisandthat's picture

Sorry, that was dumb - that's for an *implementation* of sha, not crack lol; was looking up cracks and it came up and I just assumed it to be one, without actually looking into it :(

Either way, sha1 weaknesses have been found, public ( or private (, and these are just the "known knowns" and "known unknowns"; we obviously don't know anything about any possible "unknown unknowns", but we do know, for instance, that Aes candidates were getting disqualified as weaknesses were being found, and have to assume Us gov wouldn't publish an algo it didn't know how to crack...