Bitcoin fees, death, and taxes. Let us help you unpack one of life’s certainties.
Ever notice how sometimes, the fees associated with any given bitcoin transaction seem uncharacteristically low? Or perhaps they seem incredibly high? Fees associated with bitcoin transactions aren’t cut and dry- meaning that there is no one fee that everyone pays, instead fees are variable based on two major network factors. While the idea may seem complicated at first, figuring out exactly what to expect from bitcoin fees is a pretty simple process once you have a general understanding of how they are calculated.
While more people than ever are looking towards cryptocurrencies like bitcoin, not just to use as an investment in their future, but instead as an everyday currency will need to pay the fees associated with the maintenance of the network. Just the same as any other utility comes with fees. Perhaps the best part of bitcoin fees is that you know they’re going directly to those people that maintain the network- the miners. If you’re using Bitvavo, or another exchange platform that is upfront and transparent about the fees involved, you can rest assured that your hard earned money won’t be going simply to line the pockets of CEOs, but instead to the workers themselves.
How Transaction Fees Are Allocated
While most people who understand bitcoin and how the network works to a degree believe that all miners receive rewards for each transaction, they mine, this isn’t actually true. Miners must validate at least 1MB of transactional data before they’re eligible for a reward. Then, they must be the first miner to reach the correct solution to the equation- then they will receive a mining reward. While block rewards are a great way to earn bitcoin, miners currently only receive 12.5BTC in rewards for their efforts, and that amount is reduced by half each time 210,000 blocks are mined- which happens roughly every 4 years.
So how exactly does a miner cover the often-extortionate costs of energy and hardware required to become a miner in the first place? Well, they also receive the transaction fees associated with your bitcoin movements. Fees will vary according to a couple different factors, things like how busy the network is, or how large of a transaction you're attempting to send. If the network is busy, and validation times are stretched out, then users can opt to pay higher fees to push their transactions towards the front of the mining queue, reducing wait times to about 5-10 minutes. If you’re not too fussed, then lower fees will have you looking at a transaction validation time somewhere in the ballpark of 10-30 minutes.
Fees not only incentivize miners, but they also help the network to function. Without miners, the bitcoin network would crumble. While it isn’t often that miners make a huge overhead, most miners have either been in the game long enough to enjoy a reasonable living, or are part of mining pools. Mining pools are where large groups help fund the operating costs of mining computers, then fees and block rewards are distributed to the investors according to their stake in the pool. Which again, will only slowly accrue BTC, but for those who have the time, access to hardware, and knowledge available, can often turn a reasonable profit.
Deciphering the Cost of Fees
On top of how quickly you want your transaction validated, larger transactions also cost more to send, this is mostly because fees are directly related to the amount of data that each transaction requires to be processed. This coupled with the amount of traffic, relative price of bitcoin, and a number of other factors will determine what to expect in fees. There are mathematical equations that can tell you how to calculate fees yourself, but generally- and especially for new investors- turning toward Bitvavo, or any other exchange platform you use is the best choice for determining the fees you will pay.
There are also a number of websites you can go to that will offer you a fee calculator. Check out the options available as they all work slightly differently to one another. Some calculators offer both a Satoshi and USD function, while others will require either intimate knowledge of Santoshi’s, or an open tab with a USD-Satoshi converter. So, while it may seem irritating that decoding fees seems almost as difficult as mining itself- just remember that a number of factors influence the costs associated with the transaction- and the bitcoin network is priceless.