Bitcoin Transaction Fees

/Bitcoin Transaction Fees

Have you ever wondered what is the logic behind the Bitcoin transaction fees?

Bitcoin Transaction Fees 2018-04-09T11:29:53+00:00
Bitcoin Transaction Fees

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  1. What Are Bitcoin Transaction Fees?
  2. How does the Bitcoin fee system work?
  3. Can high Bitcoin transaction fees affect the use of Bitcoins?
  4. Potential solutions for the high Bitcoin transaction fees

What Are Bitcoin Transaction Fees?

If you are familiar with bank transfers or any other forms of transactions that involve the transfer of currency/currencies from one party to another, you must have definitely been charged some transaction fees by the bank or any institution that struck the middle ground in the transaction.

Bitcoin transaction fees are similar but distinct in a number of ways with the various costs we incur on a daily basis while processing various financial transactions. Sometimes, I feel the transactions fee I incur are fair while at other times I always have the intuition of having been overcharged (which is pretty annoying), this is common for every one of us; let’s find out what the first decentralized currency’s settlement transaction fees has in store for its users such as me, you, and them.

Bitcoin transaction fees are the varying costs incurred while moving Bitcoins from one address to the other. A Bitcoin address is a possible destination for a Bitcoin payment; in a similar manner that you send emails to your friends, family, and other associates through their addresses, you can also send Bitcoins to your different financial associates via an address.

How does the Bitcoin fee system work?

Before we dig into the details of Bitcoin transaction fees, it is important that we reflect what we already know about Bitcoin Mining. Every minute, hundreds of transactions are conveyed via the Bitcoin network. These sent and received transactions need to be accounted for (documented) in the public ledger (blockchain) that lists every Bitcoin transaction made.

Powerful computers (miners) that make up the Bitcoin Network (blockchain), decide the order in which transactions are included in the public ledger. There are several factors that guide the powerful computers in deciding the order in which to include transactions in the network; the mining fee is one such vital factor.

Miners don’t approve transactions in the blockchain for free, they are entitled to receive payment in form of Bitcoins for every transaction they add to the blockchain. Basically, they are two types of payments miners receive. The first one is from the system for adding new blocks, while the second one is attached Bitcoin fee by users who want their payments to be fast processed.

In case the reward for including generating new blocks in the system reduces in the near future (as has been witnessed in the recent past), transaction fees Bitcoin has will grow more prominent since they determine how fast a given transaction is approved in the network.

How are the Bitcoin fees calculated?

There are certain parameters that indicate if and when you need to pay Bitcoin transaction fees, these guidelines include;

  • Smaller transactions pay a fee as a security precaution

If the amount you are sending totals up to less than 0.01 Bitcoins, you will be required to pay a miner’s fees.

The fee acts as a safety precaution for preventing users from spamming the network with microtransactions.

The fees also apply when you get a change back from your inputs amounting less than 0.01 Bitcoins. For example, If I am buying a painting from you worth 2.999 Bitcoins but send an input of 3.000 Bitcoins, the 0.001 change I receive from you will be subject to a fee of 0.0001 Bitcoin (charged for any transactions less than 0.01 Bitcoins).

  • The smaller the number of inputs per transaction the lesser the fees (subject to rule number 1)

Sounds confusing?! Every transaction is made up of inputs. Suppose you receive a payment of 2 Bitcoins from John and another of 3 Bitcoins from Juliet, you will have two new amounts in your wallet of 2 Bitcoins and 3 Bitcoins respectively.

Despite the two totaling up to 5 Bitcoins, they are not merged to form a single pile of 5 Bitcoins. Instead, they are recorded as separate collections of Bitcoins. The collection of different amounts of payments are referred to as inputs.

If Jane sends you four inputs of 0.5 Bitcoins each summing up to 2 Bitcoins rather than send the 2 Bitcoins as one input, the former four transactions are likely to incur more fees than the latter one transaction.

  • Older and high-value coins enjoy lesser fees

Old Bitcoins are coins that have been moved around for quite a long time. If the inputs in your transactions are ‘older’, there is a great chance that they won’t require a fee. Each transaction is given a priority based on the age of the Bitcoins, size, and number of inputs.

  • Transaction size affects transaction fees

Each Bitcoin transaction is made up of a piece of code of a given size (just like those in your computer). In January 2013, the average transaction size was 450 bytes. In October 2015, the transaction size increased to averagely 600 bytes.

The larger the size of a transaction the more the Bitcoin processing fees it will encounter. This is because the larger transaction takes up more space inside each block of the transaction, locking out the fast processing of other transactions due to blocking size limitations.

If you know your transaction size, you are in a position to decide how many satoshis-the smallest unit of a Bitcoin (0.00000001 bitcoins), you want to pay for every byte of your transaction.

For example, if your transaction size is 600 bytes and you are willing to pay a Bitcoin fee of 20000 satoshis, you will be in the 33.33 satoshis per byte section. This means that your transaction will be roughly included in the next 33 blocks of the transaction.

Who takes the Bitcoin transaction fees?

The miners retain all the Bitcoin processing fees for every transaction they approve to the network.  As a result of this, miners have the affinity to quickly approve transactions with higher Bitcoin fees into the Blockchain.

Can high Bitcoin transaction fees affect the use of Bitcoins?

Debates have been brewing among Bitcoin users concerning transaction speeds and fees. According to Ripple’s cryptocurrency Co-founder, Brad Garlinghouse, Bitcoin is not well positioned to solve the payment problem. “ Two years ago, people predicted Bitcoins to solve all transactions problem. Apparently, what we see is divergent from the predictions.” Brad said.

In Bitcoin’s Whitepaper, Satoshi Nakamoto (the Bitcoin Founder) is quoted stating that,”the cost of mediation surges transaction costs, this restricts the minimum transaction size and cuts off the possibility for small casual transactions.”

Until the beginning of 2017, Bitcoin fees were relatively below $1. Users used to brag much about the cryptocurrency’s network low transaction costs which were often much below what they incurred while making credit card payments. By the end of 2017, the Bitcoin fees were totally different, having skyrocketed to averagely $28 per transaction.

According to experts, the unmatched interest in the use of Bitcoins by many individuals has created a relatively huge number of too many transactions for the Bitcoin network to fast and cheaply process hence the high transaction fees and dragging transaction processing speeds.

Many individuals who are trying to make use of Bitcoins as a platform for small casual transactions have begun shifting to other alternative cryptocurrency networks as it is now impossible to support small transactions that sometimes almost equal the amount being remitted. Bitpay is a good example of companies that pulled off their support for Bitcoin micropayments as a result of the high transaction fees incurred in using the cryptocurrency.

Cryptocurrencies such as Ethereum that offer the most innovative platforms and low transactional fees as Bitcoin struggles to put its house in order are reaping huge benefits from thousands of migrating Bitcoin users in search of cheaper alternatives. This is according to Charles Hayter, the CEO of Crypto Compare.

What are the potential solutions for the high Bitcoin transaction fees?

  • The first solution which Bitcoin was looking forward to implementing but later on dropped is increasing its block size in the blockchain. Bitcoin was initially expected to upgrade its block size from the current 1MB to 2MB in its Segwit2x This was aimed at reducing the strain on the cryptocurrency’s network and lower the transaction fees.
  • The problem with increasing the block size from 1MB to 2MB is that the network will once more suffer a split, which can lead to more unforeseen trouble for users.
  • In August 2017, unhappy members of the Bitcoin Community (in support of Segwit2x) as a result of its low transaction processing rate and high Bitcoin fees sort to split it into a token referred to as Bitcoin cash. This is referred to as “hard fork”. Bitcoin cash allows for up to a block size of 8MB.
  • Another problem arising from increasing the block size is that users who use Bitcoin for small remittances will be knocked out of the cryptocurrency’s This is unacceptable to the Bitcoin founders based on the fact that users under this category are the ones who have taken huge control of the network.
  • A second solution is referred to as the “Lighting Network”. The Lighting Network is suggested to use a new payment technique called “payment channels.” The payment channels mean that the Bitcoin transactions do not have to be registered individually on the blockchain.

Instead, the channels will allow users to make payments through cryptographically enforced IOUs (I Owe You); which are small documents that acknowledge debt owned by one party to the other. Many of these IOUs can then be bundled up together and submitted as a single batch to the blockchain.

In theory, the Lighting Network is viewed as a solution that will reduce the congestion problem currently being faced in the Bitcoin network while processing transactions.

  • Since the first and second options are long-term considerations, businesses currently relying on Bitcoin as a fast and cheap transactional platform will have to shift to other cryptocurrencies such as Ethereum, Litecoin, and Ripple in the meantime. These altcoins platforms as not only cheap to process transactions but take a matter of few minutes to confirm transactions.

Last Words

Initially, the fees for transacting in Bitcoin were fairly low which attracted a huge number of users. With an increase in users and number of transactions to be processed per given time, the Bitcoin Network was crowded, thereby leading to the surge in transactional fees and slow transaction processing speeds.

The high mounting transaction fees have been forcing users utilizing the platform for smaller transactions to opt for other cheaper altcoins. Nevertheless, long-term solutions such as Lighting Network will probably hold a bright future for the leading cryptocurrency.

To unleash more latest trends in Bitcoins and other altcoins, you are welcomed to view our other posts. Thank you.

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