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Bitcoin Transaction Fees Explained

Transaction fees are levied on every Bitcoin transfer. Satoshi Nakamoto, the anonymous creator of Bitcoin, introduced transaction fees to maintain the network’s sanctity by preventing spam transactions that could slow down the network.

These are the fees directly paid to Bitcoin miners and payment processors for facilitating transactions. They are significantly less than what banks and traditional payment gateways charge for processing payments. Transaction fees are largely determined by demand, the size of a transaction, and payment gateway charges.

Whether you like it or not, transaction fees are an integral part of the Bitcoin blockchain. But why? What exactly are transaction fees, and how are they calculated? And is there anything you can do to minimize them?

Let’s find out.

What are transaction fees (mining fees)?

Mining fee, also known as network/transaction fee, is a small fraction of Bitcoin that is paid to miners for validating transactions and including them in the blockchain. This incentive attracts more and more users to start mining, which is crucial to protect the Bitcoin network’s security. Without miners, the Bitcoin network would cease to exist.

To understand the economics of transaction fees, we first need to understand how Bitcoin transfers work.

Unlike traditional payments, Bitcoin transactions are recorded in the form of entries on the Blockchain. When you initiate a payment, your transaction is broadcasted to the Bitcoin network, where each and every node (a computer running the Bitcoin program) validates your transaction.

Once the transaction is deemed valid, it is sent to Mempool (Memory Pool) — waiting to be confirmed by miners. At this point, the transaction is marked as unconfirmed, and a miner has to add it to a block to confirm it. After a transaction is confirmed, it cannot be reversed.

The process of validating and confirming transactions is called Bitcoin Mining. Miners deploy high-end equipment and use their computational resources to participate in mining. A certain amount of Bitcoin in the form of transaction fees is rewarded to miners for using their resources to keep the network secure and avoid double-spending.

Learn more: Bitcoin Mining: A Comprehensive Guide

Bitcoin’s transaction speed is directly proportional to the fee associated with a payment. Transactions with a higher fee are prioritized and included in the next block immediately, as there is only a limited amount of space in each block.

For validating and adding new blocks to the blockchain, a miner gets newly minted Bitcoins (also known as block subsidy) and transaction fees. The sum of block subsidy and transaction fees is called block reward.

With each Bitcoin halving, the block subsidy is slashed by 50%. Thus, transaction fees will play a significant role in keeping the Bitcoin network secure over the long run.

Different types of transaction fees

There are several fees associated with every Bitcoin transaction. Let’s understand them individually.

1. Mining/Network fees

Mining/network fees directly go to miners for verifying transactions. Unlike bank transfers, Bitcoin transactions are processed in blocks. Each block can hold up to 4 MB of data. Thus, if there are a lot of high-value transactions, the mining fees will increase significantly. This is because each block can hold a limited number of transactions, and miners often target transactions with higher fees first.

2. Service fees

This is the fee you pay to third parties for facilitating the transaction. This could be your payment gateway, a cryptocurrency exchange, a Bitcoin ATM, a marketplace, or another service provider involved in the transaction. Your service provider may charge you a flat fee or a certain percentage of total transaction volume.

At Speed, we levy zero fees until your total transaction volume reaches 0.5 BTC (approx. $21,428). After that, all you pay is 1% of your transaction amount.

Speed Levies Lowest Transaction Fees

Speed has helped thousands of businesses streamline their Bitcoin transactions. Sign up today to experience lightning-fast Bitcoin payments.

How are Bitcoin transaction fees calculated?

Transaction fees are applied to each and every Bitcoin transfer. There is no universal formula to calculate how much fees will be applied as they are majorly determined by the size of a transaction and users’ demand for block space. Let’s understand how fees are calculated for Bitcoin transactions.

Every Bitcoin transaction you initiate has a size, just like files on your computer. Since miners are always looking for ways to maximize their profit, they will often prioritize high-value transactions as they have a larger fee-to-size ratio.

A fee-to-size ratio, also called feerate, is simply the number of Satoshis the miner will earn per byte for facilitating your transaction. Historically, the average transaction fees have always remained between $0.50 to $2.50. However, during periods when the transaction volume is high, the fees have spiked significantly.

You can check the feerate anytime via this link. This rate varies depending on how congested the network is at any given point in time.

How to minimize Bitcoin transaction fees?

While you have no control over the fee you will be charged, there are a few ways you can minimize them. Let’s explore.

  • Time your transactions: Fees are generally higher when a lot of people are initiating transactions. Thus, if you want to minimize your fees, time your transactions when the network has fewer transactions than usual. You can check the volume of transactions in mempool via this link. To minimize the fees, initiate transactions when the network is less congested.
  • Use Lightning Network: Also known as “Layer 2”, the Lightning Network is a second layer on top of Blockchain that not only minimizes the network fees but also enables faster settlements. You can use the Lightning Network for transacting Bitcoins. Speed supports both on-chain and Lightning Network transactions.
  • Compare service provider fees: On top of network fees, several crypto platforms also levy additional charges for using their services. To minimize the cost of your transaction, you should check the platform you are using has minimal transaction fees.

Get started with Speed and save your transaction fees

Accepting Bitcoins with Speed gets easier with our flexible pricing plans. Whether you are a freelancer or a giant corporation, you can get started with Speed for free. Only a 1% payment processing fee will be applied to your transactions once your total payment volume exceeds 0.5 BTC (≈$21,500). There are no additional fees or recurring charges for using our services.

At Speed, we aspire to make Bitcoin payments accessible to everyone as simply and as affordably as possible. Our payments platform has empowered hundreds of thousands of businesses to harness Bitcoin’s potential. You, too, can start accepting Bitcoins across your online and offline channels via Speed.

Sign up today to explore our diverse payment features that will help you collect payments in just a few clicks.

Speed Team