ADSactly Crypto: How Bitcoin Transaction Costs Work
I often get asked this question, and I think it's an important one to go into detail about and that is the cost of using Bitcoin. People are already sceptical about Bitcoin due to its price validity and buying Bitcoin, moving it around, trading it or purchasing with it will incur transaction fees.
Each time you sync a transaction to the blockchain, you will need to pay for those miners to confirm the transaction to the chain. These transaction fees are then paid to the miner that completes the block.
While miners do earn rewards via Bitcoins inflation pool which currently rewards them with around 12.5 BTC per block, they also receive minding rewards from all the transactions they lock into the next block.
Bitcoin transaction fees may not be the most significant incentive to miners now, but in the future, as block rewards continue to half until it stops completely, transaction fees will continue to be the incentive for miners to secure the network.
Image source: - medium.com
Understanding Fees on the Bitcoin Network
When a user creates a Bitcoin transaction by transferring Bitcoin from one wallet to another, they need to include a transaction fee. The fee, as explained, is paid to miners to incentivise miners to add their operation to the blockchain and securing the network.
Each Bitcoin block contains a limited amount of space and miners will always try to maximise profits by add transactions with higher fees to the blockchain first. This means that more significant purchases or transactions set to a higher fee get picked up and confirmed first.
Bitcoin transactions are in a constant bidding war where the cost of transactions fluctuates based on the number of transactions needing to be processed and the size of the transaction.
What happens to transactions not enticing enough
If your transaction isn't appealing to miners, it will remain unprocessed and sit in a pool of unconfirmed transactions called the Bitcoin mempool. Miners do trend to get to it eventually, but if time is of the essence, then you might want to opt to pay higher fees to get it confirmed sooner.
What if a transaction doesn’t get confirmed?
Bitcoin transactions will eventually either be verified or rejected by the network. A declined transaction results in the funds remaining in the wallet the transaction was made from (typically in between 1 and 7 days).
So rest assured if you send to an invalid Bitcoin address, or if you include fees that are too small or no fees at all, or if for any reason that could be bound for an official rejection by the network then you will not lose your funds.
However, if you send to an address that is valid, but it is an incorrect address, then those funds could be lost forever.
How are Bitcoin fees calculated
Bitcoin transactions have three priority levels that affect the transaction price you pay, namely:
- Next Block Fee: fee to have your transaction mined on the next block (10 minutes).
- 3 Blocks Fee: fee to have your transaction mined within three blocks (30 minutes).
- 6 Blocks Fee: fee to have your transaction mined within six blocks (1 hour).
Most wallets will use dynamic fees to calculate the cost of your transaction based on the priority above as well as the size of your transaction. The Bitcoin network charges roughly 25 satoshis per byte used for the transaction.
While this is relatively inexpensive now as the price of Bitcoin increases, those 25 Satoshis can add up to a substantial amount with rates being as high as $40 for a transaction at its peak.
Image source: - bitcoinfees
If you don't feel like doing all the calculations yourself or simply want to check out what it could cost you to transfer BTC in real-time. You can use this site to monitor current Bitcoin transaction free pricing - https://bitcoinfees.info/.
Sources:
Previous ADSactly Crypto posts
- ADSactly Crypto: What Is the Bitcoin Halving?
- ADSactly Crypto: What Is A Bitcoin Paper Wallet
- ADSactly Crypto: The Importance of Private Keys
- ADSactly Crypto: How Bitcoin Futures Could Affect The Future Of Bitcoin
Authored by @chekohler
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I appreciate your sustained information, @chekohler. At some point, maybe you can be useful to me. Greetings.
Thank you! Glad you find it interesting and hopefully helps demystify Bitcoin so you know exactly what you're getting into when using the currency and investing :) Keep stacking Sats!
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