How are BTC transaction fees determined?

Transactions in BTC take up space in the Bitcoin blockchain. Additionally, including them in a block also requires a certain amount of processing power on the part of the miners. For that reason, transaction fees have to be paid for each and every transaction in the Bitcoin ledger.

Transaction fees are expressed in satoshis per byte of transaction data. If you check websites with BTC transaction fee charts, you will find that the fees range from a few satoshis per byte to more than a 100 satoshis per byte. So, how is a trader supposed to know how high the fee for their transaction should be set?

BTC Fee Essentials

• Fees are an incentive for miners to add transactions to blocks.
• Fees are expressed in satoshis per byte of transaction data.
• Transactions with high-enough fees are processed without delay, which means they are processed with the next block.
• Transactions with lower fees are processed with delay. In rare cases, they are never validated and could be dropped from the mempool.
• As of writing this article, the lowest transaction fees revolve around 6-12 satoshis per byte.
• With the median transaction size being 225 bytes, this amounts to a median transaction fee of 1,350-2,700 satoshis per transaction.

Why do BTC transaction fees have to be paid?

Bitcoin’s block size caps at 1 MB, so each block in the Bitcoin blockchain can only hold just under 1 MB of transaction data (some space is reserved for block data). SegWit helps this restriction somewhat by creating some virtual space, but not enough to eliminate block size limitations entirely. During a busy period, not all transactions from the mempool can make it into the next block. To incentivize miners to include your transaction in the blockchain, the fee you decide upon should be on par with those set by other transactors, or even outcompete them by offering a higher fee.

The link between fees and delays

For certain transactors, knowing that their transaction will be processed at a certain point in the future is not enough. Instead, they want their transaction to be included in the very next block. This means that their transaction will be processed without delay. The only way to be sure that a transaction will be included in the next block is to set a fee that is higher than those set for other transactions in the mempool.

By contrast, it might be enough for a transactor who is in no rush to know that their transaction will eventually be processed. It does not necessarily have to be added to the next block. Instead, it can be included in two-blocks’ time or more. Sometimes, dozens or even hundreds of blocks will pass before a transaction is finally added to the blockchain. In theory, certain transactions could get stuck in the mempool indefinitely. Nevertheless, they are most often discarded when they have been queued for too long. This normally occurs after a transaction has been in the mempool for about two weeks.

The optimal fee values for BTC transactions

Nevertheless, this does not stingy that a transactor must set the fee sky high for their transaction to eventually be added to the blockchain. In fact, fees can be set fairly low and the associated transactions will still make it through. If you do not know how high (or low) to set your fee, you can use websites like this one to find out what the current most frequent transaction fee values are.

As of writing this article, the cheapest and fastest transaction fee amounts to 6–12 satoshis per byte. Unless it is really urgent that a transaction be processed without delay, paying anything more than this, at the moment, is unnecessary and would be a waste of BTC. With the median transaction size at 225 bytes, the transaction fee, as of this article’s writing, adds up to a median of 1,350–2,700 satoshis per transaction.

When translated into USD, these fees only represent several USD cents per transaction. This means that, for the average trader, transacting in BTC is not as expensive as one might think (high-frequency trading is another matter).