What is a crypto transaction and how it works?

Cryptocurrencies such as Bitcoin, Ethereum, and Litecoin are gaining popularity as alternative forms of investment and means of payment. The start of 2023 for the cryptocurrency market has proven to be much better than initially thought, with the major assets significantly rebounding from the low price of late 2022. So is it worth investing funds in cryptocurrencies? To decide, it is helpful to know what is a crypto transaction and how crypto transactions work.

Cryptocurrency transactions – what are they?

Cryptocurrencies are digital tokens, so-called virtual currencies, i.e., currencies that do not have a physical form, that allow payments to be made directly between people using online systems. Their value depends solely on people’s willingness to pay for them in the market. 

Cryptocurrencies function in a distributed ledger system, which stores information about a specific wallet’s holdings in pre-approved cryptocurrency units. Each cryptocurrency unit has a unique code – this is where the data is contained to prevent it from being copied and re-spent. In addition, cryptocurrency transactions are encrypted and authenticated, making them secure and relatively challenging to defraud.

Many cryptocurrencies are on the market, the most well-known being Bitcoin, Ethereum, and Litecoin. Each of these currencies has its unique features and benefits for users. They represent a modern form of payment that offers many advantages but requires a cautious approach. Their value depends entirely on market supply and demand, meaning investing in them can be riskier than traditional investment forms.

How do cryptocurrency transactions work?

Cryptocurrency transactions work by transferring digital assets between participants in a blockchain network. They can be conducted in 5 key steps:

  1. Creating a wallet 

The process begins with creating a cryptocurrency wallet, a type of digital wallet or account where cryptocurrencies are stored. 

  1. Defining the participants in the transaction and determining the value of the transaction

Then, to make the transaction, the sender enters the recipient’s information, such as their cryptocurrency wallet address and the number of funds being transferred. 

  1. Concluding the cryptocurrency transaction

The transaction is digitally signed using the sender’s private key, a unique code used to authorise the transaction.

  1. Recording on the blockchain

Once the transaction is signed, it is transmitted to the blockchain network and verified by the network nodes, i.e., the computers involved in maintaining it. If the nodes verify and accept the transaction, it is immortalised in a block and then becomes part of the blockchain.

  1. Transfer of funds

After this stage, the funds are transferred from the sender’s account to the receiver’s.

Cryptocurrency transactions – are they traceable or anonymous?

If you wonder are crypto transactions traceable or anonymous, then you should know that they are traceable and not completely anonymous. For most cryptocurrencies, such as Bitcoin, Ethereum, and Litecoin, transactions are recorded on a public registry known as the blockchain, which allows the identification of the cryptocurrency addresses involved in the trades.

However, it is essential to know that the identity of the owner of a cryptocurrency address is not public and is not directly linked to the transaction in question. Cryptocurrency addresses are usually pseudonymous and unrelated to a person’s real name. Instead, these addresses are strings of characters that can be tracked within a transaction on the blockchain. 

Beyond this, cryptocurrencies are traded electronically – peer-to-peer, without any banking system, directly between users of a particular cryptocurrency. Thanks to the encryption keys, only the parties can see the transaction, although the accounting record itself is publicly available to any participant in the network. Adequate security is also provided by crypto transaction tracking and dedicated software.

What can be done to make cryptocurrency transactions secure?

To keep cryptocurrency transactions safe, it is worth implementing a few precautions. Among the most important of these are the following:

  • Choose trusted cryptocurrency exchanges

Of particular interest should be those that have a good reputation and are recognised among the cryptocurrency community. Carefully review the regulations and security features the exchange offers before trading.

  • Use strong passwords

Please, pay special attention to creating unique and strong passwords for your accounts on exchanges and cryptocurrency wallets. They should contain various characters – letters, numbers, and special symbols.

  • Enable two-factor verification

Enabling an additional layer of protection by activating two-factor verification (2FA) on your accounts on cryptocurrency exchanges and wallets is also a must. This form of authentication will enhance secure access to your accounts.

  • Be careful when clicking on links

Avoid clicking on suspicious links in emails, forums, or other websites. This could be a phishing attempt, i.e., to get your personal information.

  • Store your cryptocurrencies securely

Choose appropriate storage methods for your cryptocurrencies, such as hardware wallets or paper wallets. Avoid storing large amounts of cryptocurrencies on exchanges, as these are more vulnerable to attacks.

  • Update your software regularly

Ensure you use the latest versions of your cryptocurrency wallet software and other cryptocurrency-related tools. Updates often include security patches.

  • Be aware of threats

Regularly review information about cryptocurrency threats and take appropriate precautions. Crypto transaction tracking will help with this.

  • Don’t share your private keys

Do not share your private cryptocurrency wallet keys with outsiders. Remember that this is the key to your funds, so keep it confidential.