Pretty sure you’ve heard about how cryptocurrencies are a better finance system when compared to the traditional ones. You’ve heard things like, it’s faster, cheaper and safer (because it is decentralized).
And now you are wondering, What does it cost to trade these cryptocurrencies? We will be looking at Bitcoin transaction fees in this case. Since it is the most popular and largest cryptocurrency by market cap.
What is a trading fee?
Apart from the market price of bitcoin, each exchange charges their clients a sort of commission for using their services in the crypto space.
These fees include Maker which adds to the order book liquidity through limit orders) and Taker which subtracts liquidity from an order book through market orders fees.
In some cases, cryptocurrency traders can incur maker as well as trader fees, if the limit order is already present in the order book.
For someone looking to send funds and get a quick confirmation, the appropriate fee to include can vary greatly, depending on some factors. While the fee does not depend on the amount you’re sending, it does depend on network conditions at the time and the data size of your transaction.
Here are some of the more common fees:
- Trading fee: the fee for making trades (buying or selling) on the cryptocurrency exchange.
- Maker fee: the fee for placing a cryptocurrency order that doesn’t fulfill right away, such as a limit order (which means you’ll only purchase if the cryptocurrency drops below a designated price limit).
- Taker fee: the fee for placing a cryptocurrency order that fulfills right away, such as a market order (which means you’re buying the cryptocurrency immediately, regardless of price).
Because a block on the bitcoin blockchain can only contain up to 1 MB of information, there is a limited number of transactions that can be included in any given block. During times of congestion, when a large number of users are sending funds, there can be more transactions awaiting confirmation than there is space in a block.
When a user decides to send funds and the transaction is broadcast, it initially goes into the memory pool before being included in a block. From this memory pool, miners choose transactions to include, prioritizing the ones with higher fees.
If it is full the fee market may become a competition. With users competing to get their transactions into the next block by including higher and 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.
Again because a block on the bitcoin blockchain can contain no more than 1 MB of information, transaction size is an important consideration for miners. Smaller transactions are easier to validate; larger transactions take more work, and take up more space in the block. For this reason, miners prefer to include smaller transactions. A larger transaction will require a larger fee to be included in the next block.
There is no simple way to calculate a transaction size by hand. Your Blockchain.com Wallet will automatically do this for you, and suggest an appropriate fee.
Every cryptocurrency transaction must be added to the blockchain, the official public ledger of all completed transactions, to be considered a successful and valid transfer. The different fees are charged as an incentive for the people who provide all the services on the network
The work of validating transactions and adding them to the blockchain is done by miners, which are powerful computers that make up a portion of the network and confirm its transactions.
Miners spend vast amounts of computing power and energy doing this for a financial reward: with every block (a collection of transactions) added to the blockchain comes a bounty called a block reward, as well as all fees sent with the transactions that were confirmed and included in the block.