Bitcoin transactions are similar to international money transfers in the sense that they both require you to pay a fee, and therefore it is in your best interest to pay the lowest fee possible. In the legacy banking system it was normal to pay between $30 and $60 for a SWIFT transfer that wouldn't clear before the next business day at the earliest. However, with Bitcoin it is possible to send hundreds of millions of dollars in 10 minutes for less than $1 in fees any day of the week. Here we will discuss how Bitcoin transaction fees work and how much you should expect to pay.
How are Bitcoin transactions processed? All new Bitcoin transactions are placed in a waiting area called the Mempool where they wait to be selected by a Bitcoin miner and added to the Bitcoin blockchain. The transactions that paid a higher fee rate than the others are assigned higher priority to be added to the next block.
The fee rate is calculated in satoshis per vByte (sat/vB), which is the amount of satoshis paid divided by the size (in virtual bytes or vBytes) of the transaction. Transactions from one address (called an input) to one or two addresses (called outputs) will occupy little space. Transactions with a lot of inputs and outputs combined into a single transaction are larger in size (vBytes) and therefore occupy more space in the Bitcoin block. Since space is limited in each Bitcoin block, the miner selects the transactions according to the fee rate paid to be included in the block. Each new transaction that enters the Mempool will be prioritized by the fee rate paid. That means during times of high transaction volume (network congestion), a smaller sized transaction may be included in the next block if it paid a higher fee rate than a larger sized transaction that paid a lower fee rate even if the actual fee in satoshis of the smaller transaction was lower.
During periods of low transaction volume, it is sufficient to pay the minimum fee rate, which is currently 1 sat/vByte. For example, a transaction from a native SegWit Bech32 address to one or two addresses may only pay around 229 satoshis ($ 0.22) no matter the monetary value of the Bitcoin transferred. Transactions from SegWit Bech32 addresses (which start with "bc1") use less space compared to legacy non-segwit addresses and thus the transaction fees are lower.
Meanwhile during periods of high transaction volume (e.g. office hours in London and New York), fees up to 30 sat/vByte or more may be required in order to get added to the blockchain sooner rather than later, but that still may only cost 3,259 satoshis ($ 3.17) for a small SegWit transaction.
What about confirmations? If I pay a higher fee rate, will I get faster confirmations? First of all, while your transaction is in the Mempool, it is still pending and unconfirmed. Once your transaction is selected by the miner and added to the blockchain, it will then have its first confirmation. Each additional confirmation comes automatically after each subsequent block is added to the blockchain after the block containing your transaction. A new block is mined on average every 10 minutes. As such, it will take approximately one hour to have six confirmations no matter the fee paid. The convention is to wait until you have six confirmations before a transaction can be considered having low risk of being invalidated by an attack on the Bitcoin network.
If you're transacting with someone who wants to wait until the transaction has 100 confirmations before they will consider it confirmed on their end, then that means you'll have to wait approximately 17 hours after your first confirmation. Paying a higher fee rate will not reduce the amount of time you'll have to wait for 100 confirmations. Therefore, your primary focus is to pay just enough to get included in the blockchain sooner rather than later.
If you're the recipient of a transaction that is taking a long time to get its first confirmation (i.e. it's stuck in the Mempool), you as the recipient can use Bitcoin's Child Pays For Parent (CPFP) feature to increase the fee rate of that transaction in order to increase its priority. Check your Bitcoin wallet's guide for details.
What is a reasonable fee? That depends on the current network congestion level and how soon you want to have your transaction's first confirmation. If you need to have your transaction confirmed within the next half hour, you could try setting your fee rate to 3 or 4 sat/vB (for example), and if your wallet supports Replace By Fee (RBF), you can adjust the fee higher afterwards if your transaction doesn't get selected for the next block.
On the other hand, if your transaction isn't urgent or if you're creating the transaction in the evening (New York time), then setting the fee rate to 1 sat/vB should be sufficient.
In this new world of cryptocurrency payments, what sense does it make to pay more in fees than in the old banking system? Would you agree that 10% of the transaction amount is pretty high? Compared to credit card transactions and international wire transfers, 10% is absurd. Yet people regularly pay more than 10% when sending Bitcoin. It happens so frequently that we had to set the threshold to a minimum fee paid of $50 and a minimum transaction fee percentage of 10% in order to prevent a ton of smaller transactions from being displayed on this site.
The purpose of Blunder is to raise awareness of how the Bitcoin transaction fees work and help people understand when they're paying too much. Too many people fail to realize that you can actually pay more in fees than the amount transferred so we decided to showcase those transactions in addition to transactions with higher fees that people would not normally make in the old financial system.
By using a wallet that supports native SegWit Bech32 addresses and the Replace By Fee feature, and being mindful of the time of day that you're creating your transaction, you can keep your fees to a minimum. As Bitcoin continues to increase in value, each satoshi lost will one day be an entire fortune lost.
Bitcoin is the rarest asset on Earth. Take care of it and don't waste it!
Last updated: September 2021