Bitcoin Transaction Fees Have Skyrocketed – How To Deal With That?
Bitcoin price has soared during the past few months, which was also associated with a sharp rise in transaction fees. Currently, on average costs around $20 to send a transaction across the bitcoin network. This has forced many businesses and individuals to refrain from using bitcoin, especially that the fees tended to be below $2 a couple of months ago. Many people use bitcoin as a currency, not as a speculative asset, so for those, these inappropriately high fees represent a major problem that can ruin well established business models. Throughout this article, we will try to look through solutions to overcome this problem, but firstly, we will have to understand why did bitcoin fees rise to such high levels.
Why Did Bitcoin Transaction Fees Soar?
To answer this question, we have to first understand how bitcoin transaction fees are calculated. Interestingly, the fee you pay for a bitcoin transaction is totally unrelated to the value of your transaction, so it doesn’t matter if you’re sending 0.01 BTC or even 100 BTC. Instead, it all depends on the size, in bytes, of the transaction you send when it gets incorporated onto a block on the blockchain. Fees are calculated on a satoshi/byte basis, so logically, as the price of one satoshi rises, the transaction fees will rise too. On average, a bitcoin transaction is usually represented by 226 bytes on the blockchain. As such, with a bitcoin price of $16,000, one satoshi is worth $0.00016. To get your transaction confirmed within 10-20 minutes, you will have to pay a fee of 1,002 satoshi/byte, so for a transaction size of 226 bytes, you will have to pay a fee of $36.23.
There is another important reason for the rise in bitcoin transaction fees; miners prioritize confirming transactions with higher fees. This has created a massive market of added incentives to miners, and users increase the fee they pay for a transaction hoping to get their transactions confirmed quickly. The number of unconfirmed transaction has been piling up during the past few weeks, according to data from blockchain.info, so if you choose not to pay an extra incentive for miners, it might take you days to get your transaction confirmed.
How can you work around those extremely high bitcoin fees?
Using a bitcoin wallet that supports the SegWit upgrade is a great solution to lower the fees you pay for your transaction. SegWit, or Segregated Witness, is a soft fork that has been implemented on bitcoin’s blockchain to solve bitcoin’s malleability problem and to mitigate the limited block size. SegWit reduces the data size of a transaction on the blockchain to almost 25% of its original size. To generate bitcoin transactions via SegWit, you need to use a wallet that supports SegWit e.g. GreenAddress, Blockchain.info, Mycelium and others. You can find a full list of all wallets supporting SegWit here. So, if you use a SegWit address, your 226 byte transaction will shrink to around 55 bytes, so you will be paying 25% of the fee you would be paying using a non-SegWit transaction. To send a SegWit transaction, you will have to generate a new SegWit address, which is marked by the 0x02, or 0x03 prefix, and then move your coins to the SegWit address.
Note: refer to your wallet’s instructions to generate your SegWit addresses and use them to generate SegWit transactions.
Another solution is to shift to alternative cryptocurrencies to make your payments. The fees of most other cryptocurrencies are still very low. For instance, it will cost you no more than $0.5 to send a transaction across Ethereum’s network. In my opinion, Bytecoin BCN, Monero XMR, Ripple XRP and DASH are promising cryptocurrencies and their transaction fees are well below $1. Also, Bitcoin Cash BCH, which is a coin that was created by hard forking bitcoin’s blockchain in 2017, is another attractive alternative as currently, it costs around $0.25 to send a transaction across its network.
In the end, it is worth mentioning that the recent rise in bitcoin’s transaction fees represents a great problem that might slow down mass adoption of bitcoin. In my opinion, the developers already have the solutions to overcome these problems, such as the “lightning network“, yet they are very slow in putting these solutions into actions.