Bitcoin Fees

Bitcoin fees are charged on all transactions across the network. So, whenever bitcoins, or fractions of a bitcoin, are sent from one party to another, a bitcoin fee is levied and used to pay the people who keep the network running.

While banks mostly set their fees in relation to the value of the transaction in question, cryptocurrencies work on a fee-per-byte basis. This is very different to the way a bank may apply charges and, amazingly, bank charges can be simpler to work out than those on a Bitcoin transaction!

Bitcoin fee Basics

Bitcoin miners have a dual purpose, which is to create new Bitcoins as well as to process and confirm transactions. In order to incentivise the miners to keep doing this, they are paid a fee for the transactions that they process. Fees are measured in a unit of a bitcoin named after Bitcoin founder, Satoshi Nakamoto, called satoshis, where one satoshi equals one hundred millionth of a Bitcoin.

So, a Bitcoin fee is priced per sat/byte. In real terms, this currently works out to around $4 - $7 dollars per transaction, which, while this is not a huge amount of money, does defeat the purpose of making small and regular transactions using Bitcoins, when a transaction costing $10 may incur an additional fee of $5.

Bitcoin Fees and Miners’ Motives

Miners are interested in the size of a transaction in bytes, not in value, because they need to know the number of bytes to include in the new block that they are mining. They only have a block size of 1MB to play with, and so priority will be given to higher paying transactions.

The average transaction size is around 226 bytes. A bigger transaction in byte size equals larger fees due to the other transactions that will need to be excluded from the particular block being processed. The fees charged are simply a case of supply and demand. Thus users offering higher fees have a better chance of having their transaction included in the current block being processed, making this a quicker transaction for the user.

Other Fee Issues

The first thing that new Bitcoin users will notice is that you cannot currently work out your transaction fees accurately, as the price fluctuates all the time depending on the number of transactions in the network needing processing and a few other variables. A Blockchain wallet will calculate the fee pretty accurately for you though, based on dynamic pricing mechanisms, which will save you a headache trying to work out your own transaction fees.

The creation of Bitcoin Cash in a fork during August 2017 has also had an unseen effect on block creation, where miners swop backwards and forwards between mining Bitcoin and Bitcoin Cash, depending on cyclical factors which make mining one currency more lucrative than the other at different times. This results in the fees being pushed up or down on both currencies depending on the availability of miners to process the transactions going into the blocks.

The recent Segwit upgrade should make processing a Bitcoin faster due to less information needing to be immediately processed.  In theory, this should filter down and reduce the costs of transaction processing. The Segwit2x fork, which would increase the size of a Bitcoin block from 1MB to 2MB, again making information processing quicker, should have a similar impact. Both of these effects will take time to filter down to end-users.