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If you’ve already done a transaction with bitcoin, whether trading it for standard fiat currency through an exchange platform or simply transferred it to someone, you probably noticed that there was a small transaction fee included. For instance, if you were to send 1 BTC right now, the recipient would receive approximately 0.99996 BTC, which means around 0.0001 (BTC) went into the transaction fee.
But the thing is, many bitcoiners and crypto enthusiasts tend to emphasize the ability of cryptocurrency to limit or even eliminate the need for transaction fees that banks and third-party organizations currently charge. So what gives? If one of the main selling points of the crypto industry is that the system is devoid of fees, why then are your transactions being tabbed with minute charges? More importantly, where do these fees come from, how much are they, and who gets them? This quick guide answers these questions and provides an insight into how cryptocurrency fees work, as well as why they’re so essential to the entire system.
Introduction to Cryptocurrency Fees
Cryptocurrency fees can come in different forms -- Network fees, Wallet fees and Exchange Fees among others. But don’t worry, not all of them will actually be charged to your transactions. These fees are either added on top of the value of crypto for your transaction or deducted from the end cryptocurrency. The actual fee you pay will actually vary based on the network you use and its capacity for confirmations. For instance, sending BTC will warrant a different fee to transactions placed on the Ethereum or Litecoin network. In the case of bitcoin, average transaction fees on its network have seen a progressive increase over the years.
And yet these fees remain one of the most attractive across the globe today. In fact, bitcoin’s payment settlement system and fees are simply light years ahead of traditional systems like banks and third-party services like Western Union and MoneyGram. How else do we explain the fact that million-dollar transactions can be conducted on the bitcoin network for a paltry fee of less than $1?
Back in November 2019, a bitcoin whale transferred 44,000 BTC, worth just over $310 million at the time, to another wallet with a ridiculous transaction fee of only around BTC 0.00004551 ($0.32). Mindblowing to say the least! Let’s assume you used a traditional method such as Western Union to wire $310 million… how much do you think the transaction fee will be? You’d have to shell out over $6 million easy and the transfer will most definitely several days as every player in the network takes their cut.
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This is one of bitcoin’s most impressive use case in recent times and the kind of development that can help people actually save money. That’s why it’s important to stay informed on the latest happenings of the crypto industry outside of the usual FUD (fear, uncertainty and doubt) being spread by mainstream outlets.
Where do these fees come from?
Most cryptocurrencies use a blockchain to keep track of all transactions adding them block by block in order to be considered valid. In our article “Bitcoin Mining and its profitability in 2020,” we explained how miners contribute to the blockchain by using large amounts of computing power to solve tough cryptographic puzzles to effectively confirm transactions.
This is where transaction fees come in. When users are conducting their transactions, they can opt to add a fee as a way of incentivizing miners to prioritize their transaction (add it to the block and uphold the security of the network). Naturally, miners will process transactions that have the highest fees first since it means they get to claim that fee. This is in addition to the ‘block reward’ they receive when a new block is mined.
Unlike traditional payment methods, however, the fee you’ll pay for a crypto transaction is not dependent on the amount you’re sending. Instead, the fee amount is based on two main factors:
- The type of cryptocurrency being used in the transaction
- How many people are using the cryptocurrency at the time of the transaction
Do I really have to pay a transaction fee?
Theoretically, no. Using bitcoin as an example, you’re not actually required to pay any transaction fees at all. In fact, since you get to dictate how much fee you want to add for a given transaction, you can simply set the figure to zero so as to avoid paying fees altogether. Keep in mind though that this may mean a longer processing time for your transaction especially on days when the network is particularly swamped.
What other fees should you be aware of in the cryptocurrency space?
Transaction fees may be the most prevalent fees in the cryptocurrency space but you’re also likely to come across other fees, such as:
- Deposit Fees -- Buying cryptocurrencies on an exchange can incur some small charges as a commission for using their platform. This doesn’t apply to all exchanges though. For instance, CoinFalcon does not charge for deposit fees for SEPA and other cryptocurrency transactions.
- Withdrawal Fees -- This varies depending on the exchange you’re using for your transaction, but they’re usually minimal.
- Conversion Fees -- Converting from one currency to another will definitely incur a fee especially since most crypto exchanges don’t actually trade the coins themselves and only facilitate the trades between buyer and sellers.
Fees are pretty much unavoidable in the crypto space. Optimizing your net return from transacting with cryptocurrencies means being aware of transaction fees and how they might affect your bottom line. In any case, it pays to do your research and go for crypto exchange platforms that offer minimal and transparent fee structures like CoinFalcon. Check out our schedule of fees and see why we’re among Europe’s leading crypto exchanges today.