What are Bitcoin network fees?

A Bitcoin network fee, also known as a transaction fee, is a small amount of bitcoin paid to incentivize miners to include the transaction in the next block of the blockchain. The fee amount can vary based on the congestion of the network and the size of the transaction.

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Table of Contents

  1. What's the Bitcoin network fee?
  2. How are Bitcoin fees determined?
  3. How do I set the BTC network fee in my Bitcoin wallet?

What's the Bitcoin network fee?

Network fees were initially used as a way to deter people from flooding the network with transactions. While that original use still exists, it is mostly a way to incentivize miners or validators to add transactions to the next block.

Many Bitcoin wallets (including the Bitcoin.com Wallet) allow you to customize the Bitcoin network fees you pay when you send bitcoin.

Bitcoin transactions incur a small fee which is paid to the miners that confirm them. Transactions with higher fees attached to them are picked up sooner by miners (who optimize for profitability), so higher-fee transactions are more likely to be included in the next batch, or 'block,' of transactions that's added to the Bitcoin blockchain. This means you can opt for faster transaction processing by paying a higher fee. Alternatively, if you're not in a rush to have your transaction confirmed, you can save money by opting for a lower fee. However, you need to be careful because if you set the fee too low, your transaction may take hours or get stuck for days. Don't worry though, you're never in danger of losing bitcoin by setting the fee too low. In the worst case, you'll have to wait with your bitcoin in limbo until the transaction is cancelled, at which point you'll again have access to it. Cancelled transactions will be reverted to the sender's wallet, meaning the balance will show up in your wallet again.

You can check the status of your BTC transactions by entering your transaction ID here: https://explorer.bitcoin.com. Please see this guide for how to find your transaction ID in the Bitcoin.com Wallet.

How are Bitcoin fees determined?

Fees are measured in satoshis/byte. A satoshi is the smallest divisible unit of bitcoin, which is 0.00000001 BTC (a hundred millionth of a bitcoin). Each transaction is made up of data, which is measured in bytes. More complicated transactions involve more data and so are more expensive. Generally speaking, this means higher value transactions (involving more bitcoin) consume more data, and so require higher transaction fees. However, it's not exactly that simple. In fact, it's entirely possible for a 1 BTC transaction to involve more data (and therefore require higher fees) than a 10 BTC transaction. To understand why, we need to look in some detail at how the Bitcoin blockchain actually works.

The system runs on what's known as the Unspent Transaction Output (UTXO) model, which is an efficient and privacy-enhancing way to manage the Bitcoin ledger. It works like this:

At first, coins are minted through the mining process. These new coins form what's known as the 'coinbase.' Now imagine a miner, who has received the current 6.25 BTC block reward, sends 1 BTC to Alice. On the ledger, this actually appears as 6.25 BTC sent to Alice and 5.25 BTC sent back to the miner, leaving Alice with a balance of 1 BTC and the miner with a balance of 5.25 BTC (the miner has an unspent transaction output of 5.25 BTC). The system is analogous to paying for something using a cash note: if the cost of the item is $2.50, you don't cut a five-dollar note in half. Instead, you hand over the whole five-dollar note and receive $2.50 in change. In our example, the miner has sent over a 6.25 BTC 'note' and received 5.25 BTC in change. As it relates to fees, even though the amount of Bitcoin involved is significant, the fee for completing the transaction will be relatively small because the transaction is relatively simple. That's because there's only one output (1 BTC to Alice) and it comes from only one input or 'note' (the 6.25 BTC coinbase transaction). If we think of notes as taking up space on the Bitcoin ledger, we can see that this transaction takes up the least amount of space (bytes) possible.

How do I set the BTC network fee in my Bitcoin wallet?

This, again, depends on the wallet. In fact, many web wallets (cryptocurrency exchanges) don't give you any control over the network fee whatsoever. Instead, they have a predetermined fee (which is almost always set higher than the actual fees they will pay). In other words, they profit when their customers withdraw/send bitcoin. This is a common revenue-generation strategy for cryptocurrency exchanges.

Most non-custodial wallets, however, allow you to customize the fee you attach to your Bitcoin transactions. The Bitcoin.com Wallet, for example, has three convenient fee settings, as well as the option to set custom fees. The default speed (“Fast”) is set to have your transaction confirmed most likely within the next three blocks (so less than 30 minutes). If you change it to “Fastest,” you’ll pay a higher fee and likely have your transaction confirmed in the next two blocks (so less than 20 minutes). Changing it to “Eco” will save you some money, but still result in your transaction most likely getting confirmed within the next six blocks, so generally less than 60 minutes. For advanced users, you also have the option of setting a custom fee. You’ll want to use a tool like Bitcoinfees to ensure you’re choosing an appropriate fee given the current state of network congestion.

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