Bitcoin Fees Explained – Are Bitcoin Transaction Actually Free ?

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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.

bitcoin coin age

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.

bitcoin transaction size

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.

bitcoin wallet and inputs

The information in this post was built using the knowledge of AlefBit (Hebrew website) and BitcoinFees – Both amazing sources for Bitcoin information.

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Ofir Beigel

Owner at 99 Coins ltd.
Blogger and owner of 99Bitcoins. I've been dealing with Bitcoin since the beginning of 2013 and it taught me a lesson in finance that I couldn't get anywhere else on the planet. I'm not a techie, I don't understand "Hashes" and "Protocols", I designed this website with people like myself in mind. My expertise is online marketing and I've dedicated a large portion of 99Bitcoins to Bitcoin marketing.

8 Comments

  1. While I agree Bitcoin’s fees are next to nothing, there are still fees. They say they have no fees attached but anyone who has even the slightest financial knowledge knows this is next to impossible. You pay only a fraction of what you would have paid if you made a bank transaction or if you used an ATM so it’s all good in the end.

  2. Andrew Clark on

    It’s interesting how they went around it and decided to use smaller fees for Bitcoins that haven’t been used in a while. This stimulates users to use their coins and keep them circulating. I’m curious how long is actually considered “old”, is this something known or it’s determined by your wallet?

    • Andrew, you got it the other way around. Older coins – coins that have been laying around for long, don’t pay fees. This actually stimulates users to not move coins around all the time. For the technical explanation about coin age just Google “Bitcoin coin age” and you can find Bitcoin Wiki articles explaining the exact formula.

  3. Rule #3 is a no brainer. I know that these fees aren’t standard and they’re decided on an algorithm, but it would have been perfect if they had an even more transparent system about this so everyone would know exactly how much they are being charged for each transaction; I know some people that are afraid to try Bitcoin because they think it has hidden fees, which is utter ridiculous.

  4. Jonathan Matthew Bridges on

    This is the most easy to understand and straightforward article on Bitcoins. I started using Bitcoin just a couple of weeks ago and I have to beat myself for not doing this sooner. It’s fast, reliable and the fees are incredibly low. I’m curious how long it will last because I wonder if it’s sustainable for them.

  5. Andy Barnshaw on

    I remember reading somewhere that Bitcoin is considering implementing fixed fees, of something around $0.41. Doesn’t this act against their no fees policy? Yeah, I get it, mining is not that easy or cheap but this acts against all the principles on which Bitcoin was built. I’m curious to see what’s your opinion on this, Ofir.

  6. Cristiana Adelina Espinoza on

    Thanks for explaining this dummy style. I am rather new to Bitcoin and I’m just getting the hang of it but I didn’t know what fees these transactions have and whether I’m forced to pay them or not. Unlike banks that do their best to scam you for extra fees and commissions, Bitcoin seems to think about its users and optimize their fees.

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