Bitcoin Exchange Fees: What Are They and How Do They Work?

How are Bitcoin exchange fees calculated, and how does the payment process work? Why do fees increase, and methods to reduce expenses. Specifics of buying and selling bitcoins.  

Many remember the situation at the end of 2017 when the fee for a Bitcoin transaction reached a critical maximum: a $50 transfer required a 100% fee. In 2018, the situation stabilized, but users fear a repeat in the coming year. Everyone is looking for ways to reduce expenses when exchanging bitcoins. FlyPay answers the key questions: how fees are calculated in the network, who pays how much, and when the cryptocurrency transaction takes place.


What is «fee»?

The fee for a Bitcoin transaction is a certain amount that Bitcoin owners pay to miners when transferring funds to any address. To understand the essence of the operation, it is necessary to understand the entire chain - how and for what payment occurs when bitcoins are sent.

1. Every computer (network node) where a copy of the Bitcoin blockchain is stored scans the transaction history. This is necessary to ensure the real existence of the crypto one wants to spend. The network node must recognize the transaction as correct.  
2. After that, it is sent to the so-called «waiting room» - Mempool. Now the miner can pick it up and include it in the next block. However, the financial transaction is «unconfirmed» yet. 
3. The operation is considered confirmed when the miner includes the transaction in a block. In periods of high activity with a long queue for confirmation, the miner prefers the operation with a higher attached priority fee. This is the transaction they include in the block. In this case, the main purpose of the fee is to show the urgency of the operation. The rule here is simple: if you want it faster, pay more; if you're not in a hurry, pay less.


Who pays it?

The mechanism for calculating the fee when exchanging bitcoins is straightforward: the user's account is debited with an amount above the transfer. For example, during a 0.3 Bitcoin operation, the fee will be 0.0004 Bitcoin. Thus, 0.3004 Bitcoin will be debited from the user's account. The fee will be indicated at the early stages of the transaction when setting all parameters. Note that during the exchange of bitcoins, there is a so-called "recommended" fee. The user sets it to include the transaction in blocks with high priority. The amount of the fee when exchanging bitcoins is determined by the size («weight») of the transaction. It's no secret that miners want to increase profits. Based on this, they prioritize operations with a good ratio of size to fee. In simpler terms, the smaller the transaction, the better. There are services that allow you to determine this ratio and show how much it will cost to add the transaction to the nearest block. Indicators constantly change. They are often influenced by network congestion, as well as several other factors:

1. Number of inputs. Bitcoin is essentially a reference to previous operations - buying or selling cryptocurrency. These references are called «inputs», and their quantity determines the «weight» of the transaction. 
2. Number of outputs. Addresses to which payments were sent are called «outputs». Suppose payment comes only to one address; then, the transaction will have two «outputs»: the recipient's address and the second - the return of the initial payment. Again, if there are many «outputs», the operation increases in size. 
3. Script level. This applies not to all transactions but only to those with special functions, such as multisignature.


How to Reduce Bitcoin Exchange Fees?

Bitcoin network fees are often not highlighted. The only way to calculate them is to calculate the difference between sent, received, and returned bitcoins. FlyPay has gathered methods that can significantly reduce the commission amount:

1. Monitor network congestion. It's worth exchanging bitcoins when the network is unloaded. For example, when the price of cryptocurrency is rising, and many want to buy it, the fee for a financial transaction can skyrocket. We recommend postponing the deal and, if possible, waiting. 
2. Wallet with SegWit support. This is a good way out - the updated Bitcoin protocol allows organizing an operation so that the output is a small file. 
3. Group inputs and outputs. Plan financial transactions ahead and choose the right strategy. This will allow you to group inputs and outputs, reduce the size of the transaction, and thus reduce the fee on the network.