The year 2024 has brought a renewed optimism into cryptocurrency, and with that a new influx of people who want to invest in the digital currency whilst learning about a world that can appear quite complex indeed.
Thanks to the rise of Bitcoin exchange-traded funds, the price of the pioneering cryptocurrency has skyrocketed, and this rising tide has lifted other crypto tokens alongside it.
This has brought a lot of people into crypto, even if you do not necessarily need to own any tokens to trade in crypto ETFs, and because of that, a lot of people are getting used to a financial field that is in many respects very different.
A crypto wallet functions like a bank account but actually stores your bitcoin like a digital cash wallet, the blockchain acts as a public distribution ledger that can track transactions and be viewed by anyone, even if the address keys make it pseudonymous.
However, one of the big early questions people have about crypto is about transaction speeds and why it is important to use an easy, versatile crypto conversion platform to take care of your transaction and trading needs.
Transaction times can vary considerably on the blockchain, sometimes completing in a couple of minutes but in other cases taking several hours or even over a day for certain transactions during certain peak periods on certain blockchains.
This can be somewhat difficult for a neophyte in crypto to wrap their head around if they’re more accustomed to the world of fiat currency but with an understanding of how both sides of the financial system work, the reasons why crypto can sometimes take longer than you might expect can be easily explained.
What Happens In A Transaction?
When you use a credit or debit card to pay for a transaction in fiat currency, whether that is pounds, dollars, euros or Swiss francs, the process of entering the card in the machine or writing a cheque for the due amount can feel immediate, even if this is largely the result of sleight of hand.
As a basic explanation of the process, when you pay for goods, they are not sent from one account to another straight away. Given the sheer number of transactions made every day, the transaction fees would be prohibitive.
Instead, when you pay for something, the bank locks the sum in question to stop it from being spent more than once, and will after potentially several days send the transaction across officially as part of a bulk batch of transactions.
This process, known as clearing or settlement depending on the type of transaction, is fundamental to how financial systems work because it allows transactions to be sent efficiently but also provides proof that a valid method of payment has been received.
This works because of the centralised nature of the financial market; the bank or clearing house acts as an intermediary for the transactions, ensuring that the seller is not short-changed and either declines the payment or charges a buyer who lacks the funds overdraft fees until the balance is restored.
This system cannot work with crypto, because cryptocurrency by design is decentralised finance, and does not require a central payment processor to facilitate transactions.
Instead, blockchain-based finance relies on a series of technological mechanisms that process transactions through the use of a validated trustless consensus mechanism.
The key part of this is the memory pool or “mempool” which is the first stage a blockchain transaction goes through on its way to the recipient.
A mempool is a list of pending transactions that are waiting to be processed by a miner or validator node, depending on whether the validation mechanism is proof-of-work or proof-of-stake.
The transaction, once at the front of the queue, will be broadcast to the other nodes on the network, each of which tests that it is valid, generally through the completion of a cryptographic hash.
If the transaction is approved and follows the rules of the blockchain, it will have its status changed from queued to pending and be broadcast to the rest of the nodes, adding the new transaction to the next block in the blockchain and this block is added to the overall network, with one added every ten minutes on average.
There is a lot of variability involved, and without a central institution to effectively take the slack, buyers, sellers and validators are more conscious of the individual steps in the process.
What Affects Transaction Times?
Typically there are a wide number of factors that can affect the time to finalise a transaction, but there are typically four main categories that can affect the end result.
The first is the block time itself; every ten minutes or so with Bitcoin, a block will be added to the network, and only at that point will the transaction be validated and the currency becomes available.
This can vary wildly between blockchains, with some cryptocurrencies being transferred in a matter of seconds, although depending on the blockchain itself you can end up facing other issues trying to find enough nodes in a network to validate transactions, also known as the hashrate.
Another part of this equation is how busy the network is at a particular time. The popularity of crypto can sometimes lead to more people wanting to make transactions at the same time, and the number that can be done at once is limited to the hashrate.
This leads to another factor being a big source of difference between different transactions and that is the processing charge or “gas fee” for a given transaction leads to validators prioritising certain transactions over others.
The busier the network, the larger the processing fee necessary to get a transaction processed faster, something that can happen quickly due to the ever-changing landscape of decentralised finance and the blockchain.
Finally, if there is a change or update to the blockchain network, it can delay any affected transactions as well, and so it is important to check not only your transaction on a block explorer but also the state of the chain itself.