Bitcoin Fees Explained – 5 Minutes To Understand How Bitcoin Fees are Calculated

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We all know that if you send or donate any amount of Bitcoin to the network, a certain fee is generally added to your transaction automatically. But who does, how is it calculated and why is it first?

All the good questions and, as Bitcoin’s use continues to grow worldwide, it will eventually be more important. This article provides all the answers you need in one place, now and forever (in theory) unless there is something fundamental about the network.

Why are there even fees at all?

The question arises from time to time and in particular the wider range of cyberpunk or anti-establishment practices you are. Although Bitcoin is fully decentralized and no central authorities are involved, fees are nice and do important jobs.

First, it avoids spamming by adding a tag to transactions. Without it, anyone can continually send Satoshis (the fractional denomination of Bitcoin, just like cents is the fractional dollar denomination) through the network jamming it and making it relatively easy to crash.

In principle, even a relatively small number of saboteurs still could do this, but the implementation of the fee is now a very costly idea, with no real benefits for those who are doing it. After all, the blockchain wouldn’t alter any previous transactions or build more Bitcoin. Practically speaking, it stops this very effectively.

Furthermore, nothing is free in life, to put it bluntly. Anyone charges for fuel and energy than your Bitcoin transaction. The fastest and fairest way is to charge a fee when you use it. The fee is only charged by the person who sends the Bitcoin, not the payee, and the price depends on many factors, as can be seen.

How are fees calculated?

Well, if you were to ask anyone who was very closely involved in the Bitcoin network, they would probably tell you to use the following simple formula:

Work out the transaction’s size in bytes, multiply it by the median byte sizes, take the response from Satoshis, split it into one hundred million and then convert it to your local currency.

So when we want to make a simple contract, it sounds like a lot of work to do and most of us wouldn’t know where to start anyway. How can I calculate the median byte size? How do I work out what the value of my transaction is? What the fuck is a byte?

Thankfully, almost all modern wallet systems automatically process the transaction fee when you pay and often give you many choices.

Simply put, the integrated calculator will look at how busy your network is, how big your transaction is (in bytes you remember, not the real dollar amount) and how quickly you want it to be sent. For Bitcoin, there is always some form of delay because the transaction has to be checked in the network, and can go from 10 minutes to anywhere.

Here is a screenshot of a sample transaction I did with one of my wallets:

https://i.imgur.com/kQ4n5U1.png

As you see, in this situation, a network charge of 9 pence (around 12 cents) was measured for a £ 100 ($130) transaction, which is a small fraction of the total amount. I will, however, wait over an hour to check this with the receiver, as no priority is given to other transactions already in the queue.

If I want to do this more easily, I will persuade network operators to give it a priority by adding my payment bid. I may pick’ Priority’ and raise my charge for the same transaction to 38 pence (about 50 cents).

https://i.imgur.com/1RJ6cKT.png

This causes my request to jump back to the front of the queue and to process it faster, and you will find that the time of approval has dropped to under an hour. This is an indicator, but the fact was that it took only a couple of minutes in this situation.

You can reduce your charges by minimizing your transactions, for example by combining your payments to one person. It is more expensive to send a hundred times than to send a dollar once, which very precisely represents the real world. If you went into a shop and purchased an item for a dollar, it would take more to count 100 pennies than count one bill for a single dollar.

Fees will, however, be quite often out of your power. One of Bitcoin’s greatest critiques remains that it can not scale, and when thousands transact at the same time, queues can grow and fees can rocket.

This is demonstrated best by imagining a bus where only a few seats are shared by hundreds of people. Those with extremely urgent business or deep pockets would give the driver greater money for bidding warfare than the previous person. It raises the fares, and if those who skipped it bus do not bid the second or third bus, and so on, they may never get on.

This is just what happened in late 2017 when transactions backed up to such an extent that fees were huge. This is still a possible scenario, while new systems are in place or under development to reduce the impact.

One, called segwit, is already more or less a staple on the network and immediately integrated into our transactions to the degree we do not even know we’re using it. A second, the Lightning Network, is an ambitious long-term project to group transactions and put them only in the main network if necessary.

Nonetheless, this second pattern is not yet widely available and should only be evaluated in research scenarios by advanced users. There is currently no deadline for this system’s wide availability.

Who gets the fees?

The short answer is that the whole fee goes to the people who run the network, but what exactly does it mean? After all, shouldn’t Bitcoin be decentralized and have no intermediaries?

Okay, but there is still someone who has to pay for the fuel and the electricity used to run the system. For technical reasons, these people are mainly called’ miners,’ but I also think it’s very suitable because it works to be rewarded by’ newly discovered’ Bitcoin and the fees for every transaction.

It is a complex process— the very basis of Bitcoin — and I do not propose to cover it here, but it is that someone must make the transaction work somewhere when you send your Bitcoin from your wallet. You must then agree with all others on the network to confirm that this is correct. Simply put, it’s how the blockchain operates and how it holds its flawless transaction record, protection and interest. If you’re ever looking into it in great detail, it’s a genius piece of work.

You, me, your next neighbor, and so on, but if you want to get involved, you have to invest in specialist equipment and pay for electricity to power it. If so, then, of course, you’d like to be paid for it, wouldn’t you? Nobody could afford to do it free and, as we have seen, spammers will abuse the system.

The takeaway

Few of us like to pay more than we have to, but the fact is that Bitcoin charges are usually incredibly inexpensive compared to conventional, centralized banks and generally much faster. This is particularly true when significant or foreign payments are made.

Recently, 44,000 Bitcoins have been transferred from one wallet to another (around $310,000,000). This would have been very slow via the traditional banking system, subject to several checks, and very costly, particularly when it was an overseas transaction.

Worse still, to do so via something like Western Union — if you could even — would cost $6,000,000 in the area. Using Bitcoin, the cost was 32 cents, which indicates that the price is based on byte size, not value.

Nor is this an isolated or extreme example. This is even very natural in the world of Bitcoin.

Although fee reliability and network speed remain a long way to go, it’s nice that your payments are only payable to people who work hard to protect the network.

And, of course, if you wanted, you could even be part of that network, this is the system accessibility.

Do Bitcoin ATMs charge a fee?

Many ATM users want to convert their money to Bitcoin to purchase or send money online, Sheffield Clark, CEO of Coinsource, said in an interview.

The explanation for the interest of non-trader types? Clark said that the increased popularity of the currency as a medium for making online transactions can be one, referring to online retailers such as Amazon, Expedia, and Overstock.com adoption.

Earlier this year, Japan started to accept Bitcoin as a legal tender, helping to raise currency prices throughout the summer. Some critics have said that the rising price of Bitcoin— and speculation of bubbles and the possibility of a collision— could delay retail adoption in the US. However, Clark estimates that most customers use Bitcoin ATMs to “send more money or buy items.” He reports that roughly 20% to 25% of Coinsource ATM customers are investor groups.

“Most of our company does not suffer from Bitcoin volatility,” he said, adding that Bitcoin was worth around $179 when it was created three years ago. “We have some people who are investors, but we have more people who use it from a kind of under-served (bank population) perspective.” Bitcoin ATMs charge an 8.93 percent average transaction fee, Coin ATM Radar said. Coinsource charges roughly 8%. Typically, Cryptocurrency ATMs charge a percentage instead of a flat fee, like bank ATMs.

The average cost of using an out – of-networking machine increased to $4.57 in traditional ATM fees last year. An unplanned trip to the ATM will cost an estimated fee of 23 percent.

Appreciation of the value of Bitcoin when purchasing a Bitcoin and when using it could be a benefit, Clark said. “This is an unintentional benefit if you appreciate it from the time you buy up until the time you spend it.”

Dustin

Since 2011, Dustin has been an active member of the community of cryptocurrencies. Dustin is a Washington-based financial-tech reporter. He's passionate about bitcoin, open source code, and decentralized apps. Dustin wrote thousands of articles about the innovative protocols.

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