Bitcoin Transaction Fee: How it Works

When Bitcoin was first introduced, transaction fees were primarily charged to prevent the network from getting backed up with spam transactions. Now, they function as a way to compensate miners for keeping the transactions moving as quickly as possible. A Bitcoin network fee, also known as a transaction fee, is a small amount of Bitcoin paid to incentivize miners to include the transaction in the next block of the blockchain. Bitcoin transaction fee: here’s how it works. In order to understand fees in detail, we first need to understand what happens when you send Bitcoins to another address:

1. The transaction is checked by every computer holding a copy of the Bitcoin blockchain for validity (these computers are also known as nodes). Basically, at this stage, the nodes are checking Bitcoin’s transaction history to prove that you have the Bitcoins you want to spend in your balance.

2. After a transaction is deemed valid, it goes into the Mempool (short for Memory Pool). This is sort of a “waiting room” where the transaction sits and waits for a miner to pick it up and pack it into a block of transactions. At this point, the TX is considered an “unconfirmed transaction” or a “confirmation transaction.” You can view the current state of the Mempool here.

3. Once a miner picks up the transaction and includes it in a successfully mined block, the transaction is considered to be confirmed.

How are Bitcoin fees determined?

Fees are measured in satoshis/byte. A satoshi is the smallest divisible unit of bitcoin, which is 0.00000001 BTC (a hundred millionth of a bitcoin). Each transaction is made up of data, which is measured in bytes. More complicated transactions involve more data and so are more expensive. Generally speaking, this means higher value transactions consume more data, and so require higher transaction fees. However, it’s not exactly that simple. In fact, it’s entirely possible for a 1 BTC transaction to involve more data than a 10 BTC transaction. The system runs on what’s known as the Unspent Transaction Output (UTXO) model, which is an efficient and privacy-enhancing way to manage the Bitcoin ledger.

How fees show up on the blockchain

The Bitcoin blockchain doesn’t list the fee paid for each transaction explicitly. The only way to deduce what fee was paid by the sender is to calculate the difference between how many Bitcoins were sent minus how many were received and how many were returned as change

How are Bitcoin Fees Calculated?

Every Bitcoin transaction requires a fee in order to get mined. Every transaction has a size, just like a file size on your computer. Since miners want to maximize their profit, they will prioritize transactions that have a larger fee-to-size ratio, or feerate. Feerate is measured in Satoshis per byte. It basically means how many Satoshis you are willing to pay for every byte of your transaction.

Best Ways to Trade

1. Avoid sending transactions when the network is busy: When the Bitcoin network is extremely busy (e.g., when the price spikes and many people are looking to buy Bitcoin), users will manually bid up their fees in order to prioritize their transactions. This can cause fees to become expensive. If you can delay a transaction to a time when the network is less crowded, you may be able to save a lot of money on fees.

2. Use a wallet that supports SegWit: SegWit (short for Segregated Witness) is a Bitcoin protocol upgrade that configures the transaction’s data in such a way as to create a file that is smaller in size. Many wallets already support this feature, and it can cut costs substantially.

3. Group your inputs: The more inputs you need to create your transaction, the bigger its size = the more fees you’ll need to pay for it. If you want to keep fees low, every once in a while, you can consolidate your inputs. This is done by sending many small inputs to an address you own at a time when fees are low. This way, you will significantly reduce your future fees since you will only have one input.

How To Save On Bitcoin Transaction Fees

1. Time Transactions for Lower Fees

Since fees are likely to be higher when a lot of people are processing transactions, investors may consider delaying transactions until a different time of day. While cryptocurrency is used all over the world, the majority of users are located in the United States.

Therefore, Bitcoin’s spot volume is highest in the morning based on U.S. time zones. However, there tends to be fewer transactions made on the weekends. Traders can time non-urgent transactions during lower volume times, reducing their miner fees.

2. Use the Lightning Network

When Bitcoin was first established, there were issues surrounding processing times. However, the Lightning Network was introduced to speed up payments by using off-chain payment protocol.

The Lightning Network can create payment channels off-blockchain that create separate ledgers and then merge with the blockchain when the channels are closed. Investors can reduce their processing times to milliseconds by using the Lightning Network.

3. Check Fees for Different Cryptocurrencies

Bitcoin is known for having relatively low fees because its mining process has been simplified over time. However, some cryptocurrencies still have much lower transaction fees. For example, the average transaction fee for Bitcoin Cash is less than one cent. Litecoin is another good alternative for low transaction fees.

Bitcoin transaction fees can become expensive if investors don’t strategize how they exchange crypto, make payments or complete other cryptocurrency transactions. Bitcoin’s transaction fees fluctuate frequently, but investors can take certain steps to lower fees. Bitcoin transactions incur a small fee which is paid to the miners that confirm them. Transactions with higher fees attached to them are picked up sooner by miners, so higher-fee transactions are more likely to be included in the next batch, or ‘block,’ of transactions that’s added to the Bitcoin blockchain.

Ultimately, it will come down to completing transactions as often as possible during low volume times. Additionally, investors should choose service providers that can provide them with the lowest service fees. You can check the status of your BTC transactions by entering your transaction ID.