One of the main reasons why crypto trading has gained such widespread acceptance in the last decade is the great speed at which one can make money transfers compared to regular financial institutions.
Sending money via banks or other centralized online platforms can take up to a week or more, especially when more parties are involved – take international transfers for example.
So, how and why are crypto transfers different?
This guide will focus on Bitcoin transfers exclusively, since Bitcoin is, without a doubt, the most popular coin with the highest trading volumes. Let’s see what factors affect this process and how long does it actually take for a Bitcoin transfer to be confirmed on the Bitcoin blockchain.
Bitcoin Transfer Explained
What is a Bitcoin Transaction?
Unlike fiat currencies, bitcoins aren’t tangible physical coins or slips of paper handed when one is buying something or paying for a service. They’re digital coins that only exist online on the blockchain, a public digital ledger protected with cryptographic mechanisms.
These coins are recorded and permanently stored on the blockchain in the form of transactions that have been verified by the peer-to-peer network, added to a block of data, and chained together.
Blockchain users get two keys, a public and a private one, to access their bitcoins. The public key is your pseudonym. Think of it as your bank account routing number that can be seen by everyone (remember that blockchain is a public ledger!) together with your bitcoin balance.
Except no one knows it’s you since your public key is just a string of random letters and numbers that don’t reveal your identity. This is the cryptographic address which people would use to send you bitcoins.
The private key, on the other hand, remains hidden from the rest of the network users. This is the signature you put on every transaction you send and the key that opens your bitcoin balance. Protect this key by all means, as you can lose your coins to hackers in a flash.
How Does a Transfer Work?
Let’s say that Alice owes some money to Bob and decides to transfer ten bitcoins (10 BTC) to his Bitcoin wallet. She will need her private key to broadcast her transaction on the blockchain network.
Every single transaction has three parts:
- Input. This is Alice’s cryptographic address that shows the history of how those coins arrived in her wallet. This way, miners can verify their authenticity and prevent double-spending.
- Amount. The number of bitcoins that Alice intends to send to Bob, i.e. 10 BTC in our case.
- Output: Bob’s cryptographic address, i.e. his public key, to which the coins are being sent.
Once the miners receive all three parts of the transaction, the verification process begins. This includes solving a very complex mathematical problem using a proof of work (PoW) consensus mechanism which requires a huge amount of computational power. As a reward, miners receive bitcoins and a transaction fee.
How Long Does a Transfer Take?
On the Bitcoin blockchain, you need at least 6 confirmations from 6 different miners in order for your transaction to be valid and the transfer completed. The average confirmation time is ten minutes. That’s the time it takes for miners to mine one block of data.
Therefore, since you need at least six confirmations, a Bitcoin transfer usually takes around one hour to be completed.
As the network continues to grow, it becomes overcrowded with incoming transactions which can cause delays in confirmation, sometimes even up to 16 hours. The two primary factors affecting the speed of the transfer are the amount of network activity on the blockchain and the transaction fees.
Bitcoin average confirmation time (Feb 2019 – Jan 2020). Source: Blockchain.com
The confirmation will take more than ten minutes if the network is suddenly attacked by a surge of transactions. Wait, isn’t the network expanding daily, with more and more miners working busily to verify all the transactions? Yes, and no.
The Bitcoin blockchain is designed in such a way that the time required to mine the next block shouldn’t take less or more than 10 minutes. That’s why roughly every two weeks, the mining difficulty is recalibrated.
Moreover, the size of one block is set at 1 MB or 1,000,000 Bytes. The average BTC transaction size is around 495 Bytes which means there can be 2020 transactions in one block.
Unconfirmed transactions. Source: Bitcoin Fees
Transaction fees act as an incentive for the miners. The higher you’ll pay, the quicker your transaction will be verified and you’ll get your first confirmation.
According to Bitcoin Fees, you need to pay $0.48 to have your transaction mined in the next block (wait time: 10 minutes), $0.44 to be mined within the next three blocks (30 minutes), or $0.08 within six blocks (one hour).
You should use these fees if you want to speed up your first confirmation. Once you receive the first, you’ll have to wait approximately 10 minutes for the next one.
Historic daily average Bitcoin transaction fees (in dollars per transaction). Source: Bitcoin Fees
The Bitcoin community is divided in terms of how to solve the discrepancies and speed up the average confirmation time and with that the transfer of bitcoins itself.
A big part of them thinks that it would be best to increase the size of the Bitcoin block to make it fit more transactions. This actually happened in 2017 with the Segregated Witness (SegWit) protocolupdate, a soft fork that increased the Bitcoin block size to a theoretical limit of 4 MB and a more realistic limit of 2 MB.
The advantage of a bigger block size would be greater transaction speed that would attract more traders and result in an even bigger and stronger Bitcoin network. On the other hand, opponents argue that bigger blocks would increase the cost of operating a node because of the CPU needed.
Anyway, even if things are to remain the same, transferring funds on the blockchain will still take less time than relying on centralized third-parties.