Bitcoin (BTC) has become accepted as a payment method and store of value worldwide. More and more companies and services such as Paypal are accepting BTC as payment and mega-corporations such as Tesla are investing multimillion-dollar sums in crypto.
Cryptocurrency exchanges, as one of the most popular channels for buying and exchanging BTC, have millions of active users from all corners of the world, transferring anywhere from a couple of dollars worth of BTC, to business transactions worth millions of USD.
All of these transactions use Bitcoin’s blockchain network to facilitate transfers and transaction fees are an integral part of the process. Let’s take a look at how the BTC network works, the role of miners, and where transaction fees go.
How Does the Bitcoin Blockchain Work?
Bitcoin is based on its blockchain network – the first blockchain invented back in 2009 and put into practice through the first digital currency in the world. The blockchain technology grew so popular that it became widely used by other developer teams that subsequently launched hundreds of altcoins built on the initial BTC network’s solutions, like Bitcoin Cash (BCH), Ripple (XRP), and Litecoin (LTC). Even drastically different blockchains, such as the Ethereum (ETH) network, were inspired by the basics of the BTC blockchain.
The blockchain is basically a decentralized, distributed ledger that chronologically notes all transactions that ever happened, but may also include other kinds of information like financial records and personal information. Each block of the BTC network contains 1MB of data. This amount of data is specific to the BTC blockchain. Other altcoins have different block sizes. Every transaction needs to be processed through the creation and verification of a new block in order to get to its final destination.
Security has always been a major issue for cryptocurrency trust, because lots of people had and still have doubts about how secure it is to use Bitcoin and other cryptos, especially in comparison to fiat money. You can’t physically keep bitcoins in your wallet. Instead, you need a crypto wallet to keep the private keys to your funds secure. All existing BTC is safe from malicious individuals since it is always located on the blockchain, but it can only be accessed by appropriate private keys.
A reliable, fast, and secure transaction of funds is the key benefit of using the BTC blockchain and this naturally comes at a cost, but the fees you pay for a transaction are really small compared to bank transfers, so these fees are definitely worth it.
The Role of Bitcoin Miners
Miners have a key role in the proper functioning of the Bitcoin network. The blockchain relies on system nodes to verify every transaction before it is processed. This is called proof-of-work, because independent system nodes, which are actually BTC miners, have to verify every transfer to make sure it isn’t some sort of scam or fraudulent transaction where somebody is trying to spend the same funds twice. This system is a safeguard against cyber attacks that aim to disrupt the BTC blockchain.
Every miner uses the computing power of his mining rig to solve mathematical problems that contribute to the processing of BTC transactions. Once enough miners verify a transfer, it gets processed through the blockchain by the creation of a new block that is added to the network. A new block is added to the chain only once the 1MB data threshold has been filled and verified.
The creation of each new block of the blockchain is followed by the mining of new bitcoins that are awarded to the miners that verified the data in that block.
We mentioned that a block of the BTC blockchain can have only up to 1MB of data and during times of especially high network traffic when lots of people are sending funds, the network can get a little jammed with a large number of transactions waiting in line to get processed.
When the network traffic is higher than usual, it can take a longer time to process your BTC transaction than the usual 3 to 10 minutes. In times of high BTC volatility, when the price is considerably rising or falling, millions of people tend to buy or sell bitcoins which often becomes a serious burden on the network, making transactions last longer than usual.
Every time you send a transaction through the network, the transfer data goes into a memory pool (mempool), before it becomes part of the next block of the blockchain. Miners process individual transactions from this pool, giving an advantage to ones with high fees. When traffic is high, transfers with lower fees will take considerably longer to get confirmed.
In these circumstances, many users choose to compete with each other by selecting considerably higher transfer fees to get their transactions confirmed fast, despite the high traffic frequency.
The 1MB of data in each block of the BTC network can contain numerous transactions. It is possible for a transaction to take up the whole block for itself, which means that it has a far larger than usual data size, but it is far more common for a block to include several transactions.
Transaction size is one of the factors that also influence the choice of miners to validate a certain transfer. Smaller transactions are quickly processed and easier to validate, which is great for miners since they can process more of these transfers in a shorter period of time.
Large transfers take more time and computing power to get verified. It is also advised to select a higher transaction fee if your transfer is larger than usual. Most of the popular exchange platforms and crypto wallets automatically adjust your transfer fee according to the size of its data.
BTC Transaction Fees
Bitcoin transaction fees are an important part of every transfer. The transaction fee determines how attractive a transfer will be for processing by miners from the mempool and those with higher fees will always get verified sooner. These fees are crucial for processing transfers through the blockchain and are used for maintaining the network.
What Happens to BTC Transfer Fees?
Every BTC transfer fee is used as a sort of reward for miners who use their computing power to process transactions and contribute to the smooth work of the whole network. Since the BTC blockchain is totally decentralized, without any institution or central authority controlling the network, the transaction fees don’t go to the developer team behind BTC or any single entity.
All transfer fees go to the exact miners responsible for processing your transactions. Apart from these fees, miners also get block rewards in the form of newly mined bitcoins. These fees are only a fraction of what a bank demands in percentage from your wire transfers, so a BTC transaction fee is more of a token of appreciation for the work of miners. Their real reward is the newly mined bitcoins that come as a result of new blocks of the chain.
Average BTC Transaction Fees
It can be very difficult to manually calculate what is the average Bitcoin transfer fee since it is constantly changing because of the volatility of BTC’s price and the fluctuation of the whole cryptocurrency market. There are, however, periods when the market is relatively stable and you can estimate the average transfer fee based on the fees paid for recently processed blocks.
If the exchange platform you are using for transferring funds or your crypto wallet don’t have an automatic fee selection feature based upon the size of your transfer, you can use a site such as Privacy Pros to check recent blockchain fees and the estimated fee of the next block in line, in satoshis.
Role of Fees in Unconfirmed Transactions
Bitcoin transfers can remain unconfirmed for some time. We already mentioned that this can happen if the network is extremely busy, but there are also a couple of other cases. If your selected BTC transfer fee is below average, miners might ignore your transaction for some time while there are transfers with considerably higher fees that are more attractive for processing.
This is why it is best to select an at least average transaction fee, rather than worrying about when your transfer is finally going to get processed. Also, if you have sent a transaction to an unexisting/wrong address, your transfer fee is unfortunately lost. This is why it is important to double-check the address you are sending funds to before confirming a transaction.
A Few Words Before You Go…
Selecting the right transaction fee is of utmost importance when sending BTC, not only because you want your transfer to get processed as soon as possible, but also as a method of appreciating the work of numerous miners that maintain the BTC blockchain with their computing power.