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Bitcoin transaction fee: Rules and Rates

bitcoin transaction fee

Bitcoin is often touted as a global cryptocurrency payment network that includes no transaction fees. That statement is true to a certain extent, but it doesn’t tell the entire story. For example, no Bitcoin fees are involved for the recipient on any Bitcoin transaction coming from another user on the network. But sometimes, there are Bitcoin fees involved, albeit very minimal.

Transaction fees in the Bitcoin world are not included in every transaction. Instead, most Bitcoin digital currency wallets allow users to include additional fees to speed up the transaction itself optionally. By speeding up, a transaction including a small fee will be prioritized in the following network block space, whereas transactions without fees have a lower priority.

Transaction fees

To be considered complete, every bitcoin transaction or data must be added to the blockchain, the official public ledger containing all the bitcoin transactions’ data. Miners do the work of validating transactions and adding them to the blockchain.

Miners and developers spend vast amounts of computing power and energy doing this for a financial reward. With every block (a collection of transactions not exceeding 1 MB in size) added to the blockchain comes a bounty called a block reward, a percentage of around 6.25 BTC, and all fees sent with the transactions included in the block.

For this reason, miners have a financial incentive to prioritize the validation of transactions or exchanges that include a higher percentage. However, for someone looking to send funds and have it confirmed, including the appropriate fees can vary greatly, depending on many factors.

While the fees do not depend on the amount you’re sending, payments depend on network conditions at the time and the data size of your transaction.

Bitcoin transaction fees

Specific exceptions to including a transaction price don’t affect the transaction speed. For example, in the Bitcoin Core client, fees are not required if your transaction is more minor than 1,000 bytes in size, has only outputs of 0.01 BTC or higher, and has a high enough priority. All of these conditions have to be met for this exception to be applicable.

If these payment conditions are not met, a standard fee of 0.0001 BTC per thousand bytes will be added to process the transaction. Bitcoin Core client users will notice whenever a transaction fee is included, as the client will prompt the user to either accept or reject the fee associated with the transaction. Rejecting that fee lowers the prioritization and affects the speed at which network confirmations are applied, though.

Average bitcoin transaction fee

Most Bitcoin transactions are around 500–600 bytes in size, and depending on the output, may or may not be subject to a 0.0001 BTC transaction(TX) fee. Including a transaction in a network, a block is entirely random but is affected by the transaction (TX) fee (if required).

Every block leaves 50,000 bytes of room for high-priority transactions — regardless of transaction (TX) fees — to be included (roughly 100 transactions per block).

After that, transactions subject to a flat fee of 0.00001 BTC/kilobyte are added to the block, with the highest fee-per-kilobyte transactions being included first. This process is repeated until the block size reaches a size of 750,000 bytes.

Network conditions

Because one block on the Bitcoin blockchain can only attempt a median transaction size of 1 MB of information, a limited number of transactions can be included in any given block. Therefore, during times of congestion, when many users send funds, there can be more transactions waiting for confirmation than there is space in a blockchain.

When a user decides to send funds and the transaction is broadcast, it initially goes into the memory pool (mempool) before being included in a block. From this mempool, miners choose which transactions to include, prioritizing the ones with higher fees.

If the mempool is complete, the fee market may become a competition: users will compete to get their transactions into the next block by including higher fees.

Eventually, the market will reach a maximum equilibrium fee that users are willing to pay, and the miners will work through the entire mempool in order. At this point, once traffic has decreased, the equilibrium fee will go back down.

Transaction size

Again since a block on the Bitcoin blockchain can contain no more than 1 MB of information, transaction size is an essential consideration for miners. Smaller transactions are easier to validate; more significant transactions take more work and more space in the block. For this reason, miners prefer to include smaller transactions. Conversely, a more significant transaction will require a larger fee to have your transaction confirmed.

Rising transaction fees

Rising Bitcoin transaction fees on the Bitcoin network

Bitcoin’s fees per transaction have grown tenfold between February 2020 and February 2021 on a 30-day average. In February 2020, the fee was 60 cents. By Feb 8. In 2021, the fee was $12.46, representing a growth of 1,976.66%. On a year-to-date basis, the fee has grown by 81.1%. The increase in the BTC transaction (TX) fee correlates with the asset’s recent surge in value. The report explores the drivers behind the rise in transaction fees.

Conclusion

The actual cost of a transaction fluctuates. Check the average costs at the moment before including a transaction (TX) fee. To be safe, include a higher than average fee to increase the chances of your transaction being included in the next block within roughly 10 minutes.

FAQ

How is the Bitcoin transaction fee calculated?

Calculate the size of your transaction in bytes, multiply it by the median byte size, take the answer in satoshis, divide it by 100 million (or 1e8 on a scientific calculator), get the answer in bitcoin, and then convert to USD. 

Transaction Fees = Transaction Size (byte) Fee Per Byte (sat/byte) Transaction fees are calculated based on the size of the transaction and are paid in bitcoin.

What is the average transaction (TX) fee for Bitcoin?

Per multiple sources, the average BTC transaction (TX) fee is 23 USD. Luckily; there are ways to cut costs. For example, in 2017, during the peak of Bitcoin’s (BTC) last bull market, average transaction fees just tapped 50 USD.

Does Bitcoin charge a transaction (TX) fee?

Bitcoin, to a certain extent, doesn’t charge a transaction (TX) fee. No transaction (TX) fee is involved for the recipient on any Bitcoin transaction coming from another user on the network. But sometimes, there is a transaction (TX) fee involved, albeit very minimal.

Who gets the BTC transaction (TX) fee?

In Bitcoin, the sender always pays the fee to push a transaction while the receiver gets it free. Thus, the seller could save anywhere from 1.8–3% per transaction.

How do I avoid the Bitcoin transaction (TX) fee?

Use Bank Deposits and Limit Orders: In general, using bank wires to fund a crypto account, buying with a credit card, and using market orders instead of limit orders can result in higher flat fees.

Shawn Du'Mmett

Shawn Du'Mmett

Former IT development and consultant, remote team and collaboration expert, PM, CCO, writer, dreamer, idealist looking to collaborate with global teams on a global teal/turquoise organisation. Shawn's dream is working together openly, to get what writers need and want, and to solve biggest global problems. He is building a collaboration system from the start that everyone can own and define, allowing them to work together, to decide how it works and to their highest ideals.

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