If you have cryptocurrency-related questions, don’t hesitate to ask them in the comment section below. I’ve been requested to explain more about the crypto network fees and that’s what I’m going to do in the next few minutes.
One important thing that I want to make clear from the start is that when it comes to cryptocurrency, the transaction fees are never related to the amount of crypto you are sending.
If you send out 1 million BTC or 0.01 BTC, the fee can be the same.
That’s why for the largest Bitcoin transaction that was made so far: 88,857 BTC, valued at over $1.15 billion dollars, the fee was only $3.54.cents
Let me explain how that’s possible.
Cryptocurrencies operate on the blockchain. Simply put, the blockchain is a database that operates, and it’s synchronized between all the computers of the network of that specific blockchain. Bitcoin has its own network and database, Ethereum has its own network and database.
These databases exist as long as the computers in the network are powered on to verify and secure the transactions. To keep a computer powered on for such a task requires funding for equipment, electricity, and also profit to incentive anyone to keep running these computers.
And since these networks are decentralized and don’t belong to any particular entity, the funding has to come within its own network, from its users.
The Bitcoin Network uses a Proof of Work algorithm to verify transactions and secure the network.
Proof of Work requires powerful computers to build the next block in the blockchain. Simply said, to put together the next database entry that gets synchronized with the whole network. But only a number of transactions can get into the next database entry, so these transactions need to be prioritized. And the priority it’s decided based on a financial incentive. The more you are willing to pay, the faster your transaction will be processed.
You can pay the minimum amount for fees but that will put you at the bottom of the list. Your transaction might still go through when there aren’t that many transactions to be processed, but that might take a very long time, if ever.
The next database entry in a blockchain network is referred to as the next block. On the Bitcoin blockchain, a new block is generated roughly every 10 minutes. If your wallet allows you to adjust the network fee and it says your transaction will be included in the next 6 blocks for example that means it can take up to 60 minutes to complete your transaction.
The longer you are willing to wait, the cheaper the network fee can be.
But not all transactions are the same.
If, for example, you received to your wallet 10 transactions of 1 Bitcoin each. You have now 10 Bitcoin, but the size of your 10 Bitcoin on the blockchain is bigger than if you received only 10 Bitcoin once – in one single transaction.
So if you send out your 10 BTC, the fee will be higher if the 10 BTC it’s a sum of more than one transaction made to your wallet.
That’s because transactions are written in code, in virtual bytes. The more code is required to send a transaction, the more expensive it will be. That’s why you will see the network fee calculated as sat/vB (satoshi per virtual byte). As a casual user, you don’t need to know the size of virtual bytes, you just have to decide how many satoshis you are willing to pay.
And you decide that by how long you are willing to wait for your transaction to be complete.
If you check a site like https://mempool.space or simply google ‘bitcoin fee estimator’ you can see the current network fee prices.
For a low priority transaction, you would currently pay 43 sats per byte or 166 sats per byte for a high priority transaction.
But as time goes by, all this gets more and more optimized, so you would want to use the latest address format for your Bitcoin. As of today, that’s called Native SegWit and it supports faster transactions and lower fees.
So it’s important to choose the right wallet if you want to take advantage of Native SegWit and pay fewer fees. I use Native SegWit on my Ledger Nano S.
If you haven’t used a crypto wallet yet, I strongly advise you to. Don’t keep your funds on a crypto app or exchange, unless you trade cryptocurrency every day.
When you withdraw from such an app, usually there’s a fixed fee to be paid. That fee is required because the company you are withdrawing from is going to pay the network transaction fee for you. A lot of times this fee will be higher compared to the real network fee. But if the network is very busy, a Bitcoin network fee can get as high as 55$, so a 5$ fee paid to withdraw is convenient then.
But don’t freak up if you see a high fee on the blockchain explorer when you withdraw from the exchange. These companies often make transactions in batches, not only for you, and they are the ones paying the fees, not you. You only pay what you were charged in the app.
The Ethereum network uses a different fee structure: you pay in Gas, not Ether. I’m going to cover Etherem network fees in my next video so be sure to subscribe and enable notifications to watch it right away.