A bitcoin transaction fee is the cost you incur when you send bitcoin from your wallet to another person’s. To explain how bitcoin transaction fees work, you need to know how bitcoins are created, which is through a process called bitcoin mining.
What is bitcoin mining?
Though bitcoin is a digital currency it isn’t produced by any central authority in the way that the supply of Dollar or Euro are controlled by the Federal Reserve or ECB; it is instead created through a process called Mining.
Let’s take a brief look at the traditional model of sending and receiving money using the most common method - a debit or credit card.
Whenever you initiate a payment with a debit or credit either online store or in shop, the transaction has to be verified by the issuer of the card - your bank, VISA, Mastercard etc. This happens to ensure you have sufficient funds in your account. The issuer will charge the shop or online store a fee for the transaction and in some cases you, the purchaser, get hit with a charge.
With bitcoin, there is no issuer (learn more about the basics of bitcoin here). Instead, a group of individuals with strong computing power also known as miners, are the ones who verify the transaction.
Once a transaction is verified, it gets added to the history of every other bitcoin transaction stored forever inside the blockchain, and the miners get a reward - in the form of a newly created bitcoin.
Yes, that is correct.
Every time a miner verifies a transaction in the network and adds them to the blockchain, the miner gets freshly created bitcoins in return.
That is a simplified description of how bitcoin is mined.
The concept of proof of work
Now, before a miner starts verifying a block of transaction, they need to show Proof of Work (PoW).
Proof of work requires the decentralized participants (miners) that validate transactions to show that they have a significant computing power to do so. In order words, you can’t just wake up and decide to be a miner. You need to show the required ability (PoW).
Once a miner has shown proof of work, they will be able to mine bitcoin in exchange for incentives. Miners compete to process block of transactions that get added to the blockchain at the fixed rate of one block every 10 minutes.
They do this by using supercomputers that churn out random guesses for a mathematical problem until it ends up with a specific range established by the bitcoin program. This is one of the marvels of bitcoin, an unhackable mathematical conundrum with just one solution that Miners compete to solve. This underpins the blockchain as it ensures a consensus is reached on the accuracy of new transaction entries, and the difficulty of the puzzle is adjusted depending on how busy the network is, to ensure a constant rate of bitcoin creation is kept.
A lot of companies invest in these supercomputers with high processing computing ability to validate blocks of transactions in exchange for mining rewards which are the bitcoin that get generated when a new block is added every 10 minutes as well transaction fees that are borne by the sender.
Bitcoin transaction fees explained
So technically, miners get paid twice:
the first payment is when they verify transactions and arrange them into blocks in the blockchain—they get a mining reward of fresh bitcoins.
the second payment are the transaction fees attached to each transaction that incentivizes them to verify the transaction ahead of others.
The current mining reward per block is 12.5 BTC, while transaction fees keep changing depending on the demand but you should expect to pay within $0.03 to $3 based on the size of your transaction, among other things.
Fees are not Compulsory
The truth is while miners will get a fee if you attach it to your transaction, there are certain rules that dictate if and when you need to pay them.
Speed of transfer
For every transaction that occurs in the network, there is a priority attached, and this is determined by the transaction fee.
Since bitcoin transactions are validated by miners, adding a fee to the transaction is a way to incentivize the miner to validate your transaction as quickly as possible.
For transactions that don't have a fee attached, those transactions might take a while before it gets confirmed. Transactions that have a fee will have a higher priority on the network, and it will be validated faster by miners.
Presently, there are over 5,337 unconfirmed bitcoin transactions in the mempool - where unconfirmed transactions sit until a miner picks them up for processing - and before you’re done reading this article, that number would have changed.
So, it’s smarter to include a fee in your transaction.
Rules of bitcoin transaction fees
If you are considering betting with bitcoin at Cloudbet you should pay close attention to the rules of bitcoin transaction fees so you don't pay unnecessary charges.
1. Small amounts pay fees
If the numbers of bitcoin you're sending is smaller than 0.01 BTC, you will be required to pay a miner's fee. This is done so users won't spam the network with micro transactions that miners have to verify.
2. Older coins pay less fees
Each bitcoin transaction is given a priority based on age, the number of inputs and size. Old coins are coins that haven't moved in a while. These type of coins might not require a fee.
3. Smaller inputs require less fees
Every transaction is made up of inputs which determines how much resources will be required to verify the transaction. If you send 1 bitcoin made up of 4 inputs of 0.25 bitcoins from your wallet, you are more likely to pay a fee than if you send 1 bitcoin made up of just 1 input.
How are transaction fees calculated?
Calculating bitcoin fees can be quite confusing for the best of us. According to most developers, it's based on a formula that works with the size of the transaction in bytes, then multiply it by the median byte size. Then multiply the result by the median byte size, take the answer in Satoshi and divide it by 100 million.
Thankfully, there is an easier way for most of us who can't wrap our head around all the technical details listed above. Many trading platforms and web-based bitcoin wallets have built-in fee calculators that help customers fix these issues.
The importance of context
In attempting to explain how bitcoin transaction fees work, you have to dig a bit deeper into how bitcoin itself works, how miners earn rewards and what influences the speed of bitcoin transactions. That context is crucial, and inevitably opens up other questions and considerations, but that shouldn't put you off. The concept of Bitcoin is relatively simple, but the practicalities can become quite complex the deeper you look. With regard to bitcoin transaction fees, if you are just interested in mitigating the cost of sending your coins or the speed, stay focused on what influence those things.
Speeding up your transactions is certainly something that might be a key consideration if you decide to transfer your bitcoin to a betting account at Cloudbet with a specific betting event in mind. Rest assured once the deposit is confirmed you can enjoy a safe and secure bitcoin betting with great odds.