What do people exactly mean when they say the person "signs" the transaction to transfer bitcoins? Is it decrypting the previous output with your private key and encrypting it with the new recipient's public key?
Thanks for your time and efforts.
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When you make a transaction, you need to unlock the outputs you’re trying to use. This is done by showing that you “own” the output, and you do this by showing that you know the private key of the address the output is locked to.
Digital signatures are used in bitcoin transactions. The goal of a digital signature is to prove that you’re the owner of a public key. Signing is an application of cryptography but in fact not a form of encryption.
You combine the private key + transaction data, and use some mathematics to create a digital signature.
You can then take the digital signature + transaction data + public key, do some more mathematics with them, and the result will confirm whether a legitimate private key was used to create the digital signature.