Last updated on April 15th, 2015 at 10:37 am
This video contains advanced concepts that were explained in previous videos. If you are new to Bitcoin it’s best to watch the previous tutorials before watching this one.
One of the major advantages of Bitcoin is that you can supposedly send money between any two points on earth for free. But if you’ve sent Bitcoins once or twice before you probably noticed that there are in fact transaction fees – so what’s going on here exactly ?
Before I explain how fees are calculated I want to explain what Bitcoin fees are. When miners order transactions into blocks inside the Blockchain they get paid twice – The first payment is by what you would call “the system” – which grants them a bounty for succeeding in entering their block of transactions. The second payment is the fees the users attached to the transactions that got included in that block.
But you don’t always have to pay these fees, there are certain rules that dictate if and when you need to pay them. Of course you can choose to disregard the rules and not attach a fee to your payment but it is then possible that your transaction will take a long time to be processed.
Rule #1 – Smaller amounts pay a fee
If the numbers of Bitcoins you are sending is smaller than 0.01 Bitcoins you will be required to pay a miners’ fee. This fee is required in order to prevent users from spamming the network with micro transactions.
Even if the whole transaction is more than 0.01 Bitcoins but the change you get back from your inputs is more than 0.01Bitcoins you will need to pay a fee.
Here’s a short example:
Let’s say you want to buy a watch for 1.999 Bitcoins. You use an input of 2 Bitcoins and receive back an input of 0.001 Bitcoins as change. Since the change is such a small amount you will require to pay an additional miner’s fee for it as well.
Rule #2 – Older coins have less fees
If the inputs you are sending in your transaction are older then there is a greater chance they won’t require a fee. Old coins means coins that haven’t been moved for a long time.
Rule #3 – Smaller transactions require less fees
Each transaction is made out of inputs. The less inputs used to compile a transaction, the less fees will be required. So if you are send 1 Bitcoin and use 4 inputs of 0.25 Bitcoins it is more likely that this will require a fee then if you were to send just 1 input of 1 Bitcoin.
Keep in mind that most times you won’t have that much control over whether your transaction requires fees or not. Your Bitcoin wallet will usually make the optimization of inputs for you so you will avoid fees when possible. Today’s miner fee is 0.0001 Bitcoin which is around $0.06 and is probably worth paying to get your transaction processed quickly.