How Do Bitcoin Transaction Work?
If you find bitcoin confusing, you’re not alone. Many Thais also want to know what bitcoin is, where to buy bitcoin, and how it works. While the mechanics behind bitcoin are pretty complex, it can be used just like you would use any traditional currency like the Thai baht.
Bitcoin, just like standard money, is a medium of exchange. It has value, can be converted to baht, and can be used to purchase goods and services from merchants. Bitcoin is not controlled by a single government or organization, though companies that operate bitcoin services are regulated in Thailand by the The Securities and Exchange Commission (SEC).
To get a general understanding of how bitcoin works, it helps to compare it against a bank transaction.
HOW BANKS SEND MONEY TO EACH OTHER
Sending money from one bank to another is a more complicated process than you’d think. Consider the following scenarios:
Scenario 1: Sending money locally
You owe a friend 1,000 THB who requested that you deposit it in her bank account. You each have savings accounts at different major banks in the Thailand.
So the 1,000 THB leaves your bank account, and your bank sends it to the Central Bank. When major banks in Thailand do transactions with each other, they do it through the database of the Bank of Thailand (BOT), which is known as the Bank of Thailand’s real-time gross settlement system (BAHTNET) for high value e-payment or the bulk payment system for low value e-payment.
Once the bulk payment system processes your transaction via direct credit, the 1,000 THB goes to your friend’s bank account.
Scenario 2: Sending money overseas
The process gets a little more complicated when you send money overseas. That’s because there’s no global BAHTNET for international transactions. Instead, domestic banks send money internationally through correspondent banks, which processes transactions on their behalf.
Now let’s say you’re working in Singapore and want to send money to your parents in Thailand. The infographic below illustrates how a typical international wire transfer would look like when you’re sending money from your Singapore bank to a Thailand-based bank.
In this example, your Singapore bank doesn’t have a presence in Thailand. So your bank would have to send the money to BNP Paribas, its domestic correspondent bank, which doesn’t do retail banking in the Thailand.
So instead, BNP Paribas sends the money to its correspondent bank in Thailand, HSBC. HSBC then withdraws the funds from BNP Paribas’s account and sends it to your parents’ Thailand-based bank. But then another bank handles the foreign exchange conversion between SGD and THB.
All these banks send international messages to each other about the transaction using SWIFT codes (the Society for Worldwide Interbank Financial Telecommunication).
Is your head spinning yet? This is actually an oversimplified representation of what happens when you transfer money through banks. The reality is a lot more complex and involves head offices and central banks. There are also additional complications such as having cut off times, clearing times, different rates for different amounts transferred, and currency exchange rates.
HOW A BITCOIN TRANSACTION WORKS
In contrast to banking, a bitcoin transaction is simpler. To send bitcoin, you need a bitcoin wallet, which lets you store bitcoin, send bitcoin, or receive bitcoin. You also need your recipient’s bitcoin wallet address.
Now, let’s say you want to send bitcoin to a friend. To start a bitcoin transaction, you simply have to copy or scan your friend’s bitcoin wallet address into your bitcoin wallet’s Send interface, then enter the amount you want to send. Once you hit the “send” button, the transaction is created by your wallet and broadcast into the Bitcoin network, where they undergo confirmation for security and transaction integrity. The process goes like this regardless of the location of the sender and recipient.
Once your transaction is verified, bitcoin miners group it with other transactions into a “block” and add this block to the Bitcoin “blockchain” – a shared, public record of all bitcoin transactions ever made. Once your transaction has been added to the block, your wallet will send you a confirmation. The recipient then gets bitcoin in their wallet.
With bitcoin, there is generally no need for correspondent banking. Every bitcoin user is under the same network. Transactions are made possible through blockchains, which metaphorically speaking, play the role of regulator, securer, organizer, communicator, and recorder.
Disclaimer: Trading bitcoin and other virtual currencies carries a high level of risk, and may not be suitable for everyone.