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28 August 2017

Here’s how to deal with those ridiculously high Bitcoin transaction fees

Four dollars. That’s how much it’d cost me to send 0.01 bitcoins, or about $42, from one Bitcoin address to another right now. 

And this is actually quite cheap compared to a few days ago, when transaction fees were even higher, making Bitcoin barely usable for microtransactions. And cheap transactions, especially for small amounts of BTC, are supposedly one of Bitcoin’s biggest advantages. 

The transaction fees are raging due to several factors. One is the size of the block in Bitcoin’s blockchain, which is limiting the number of transactions that can go through at any given time. Bitcoin’s network is powered by miners, people and companies who use a tremendous amount of computing power to create new bitcoins. And when there’s too many transactions to process—which currently happens very often—miners will prioritize transactions that pay a higher fee. 

The situation improved with the recent SegWit upgrade of the Bitcoin software, but it will take a while—weeks or months—before users start seeing benefits of SegWit. 

Another reason is Bitcoin Cash, a competing cryptocurrency that split off from Bitcoin on August 1. Since the two cryptocurrencies are similar, it’s simple for miners to switch from mining Bitcoin to Bitcoin Cash. And for reasons explained here, sometimes it’s more profitable to mine Bitcoin Cash than Bitcoin. Whenever miners start switching to Bitcoin Cash, Bitcoin’s network becomes slower, and transaction fees rise; we’ve seen this swing happen a couple of times before and it’s likely to keep happening for a while. 

This is not good for Bitcoin. A few bucks (or even a few dozen bucks) per transaction isn’t a deal breaker for investors, but for someone who wants to use Bitcoin as payment—which is kind of the point of Bitcoin in the first place—that’s far too expensive. 

The good news is that the fees are likely to get better. The bad news is that it won’t happen very soon. SegWit has paved the way for a further upgrade called the Lightning Network, which should vastly reduce fees, but the software, or even its specifications, aren’t ready yet. And in November, Bitcoin is expected to be upgraded again with the SegWit2x proposal, which should increase the block size in Bitcoin’s blockchain from 1MB to 2MB. This will reduce strain on the network and make transaction fees lower, but switching to SegWit2x requires a so-called hard fork, meaning that Bitcoin is once again splitting into two, which could bring new trouble. 

Yes, you can pay smaller fees and get away with it

Luckily, Bitcoin users aren’t completely without options right now. One thing you can do is wait until the network is less strained (at night, during the weekend), which is when transaction fees will go down. 

You can also check this service to see which transaction fees are currently the most economic for you. At the time of this writing, a Bitcoin fee of 200 satoshis per byte will be enough for your transaction to go through in about 30 minutes (Bitcoin transaction fees are expressed in satoshis , which is one hundred millionth of a Bitcoin, per byte size of the transaction, which is typically a little over 200 bytes). Have in mind that fee estimators aren’t perfect; an alternative service that shows you the currently optimal fee is this one

Paying a fee that's too high is unnecessary, as it doesn't carry any additional benefit. But paying too small a fee means your transaction won't go through fast, or at all.

Paying a fee that’s too high is unnecessary, as it doesn’t carry any additional benefit. But paying too small a fee means your transaction won’t go through fast, or at all.

This information won’t help you much if you use a wallet that doesn’t let you change transaction fees, so maybe it’s time to switch to a different wallet. For example, a mobile Bitcoin wallet called Mycelium offers several possibilities for Bitcoin transaction fees: low-priority, economic, normal priority and high priority. If you choose the low-priority fee, your transaction might take longer to go through but it will be cheaper. Conversely, a high priority transaction will almost surely go through quickly but it will be expensive. Right now, Mycelium is offering me 339 satoshi/byte as an economic transaction fee price, which is still a little expensive, but better than the “normal” price of 419 satoshi/byte.  

This is too expensive.

This is too expensive.

Image: Stan Schroeder/Mashable

For even more control, you could try out the Electrum wallet, which lets you set any fee for your transactions, though you need to enable the option manually in the settings. Be careful, though: If you choose too small a fee, your transaction might forever stay in Bitcoin’s backlog. Coinomi is another (mobile-only) wallet which lets you customize your transaction fees.

There are other things you could do to make transaction fees lower, though it requires a slightly higher level of knowledge. If you’ve received a lot of small transactions to a Bitcoin address, and then send bitcoins from that address, the transaction will be larger (in bytes) and thus more expensive. If you enable the “Coins” tab in the desktop version of Electrum you can minimize the number of inputs for your transaction, which will make it cheaper. 

If you’re moving bitcoins from an exchange and not a wallet, you likely won’t be able to set a fee, and many exchanges have very high fees set up. Exchanges mostly don’t do that because they’re evil; they do it because they want to make sure the transaction went through, or else they’ll need to deal with support tickets. Unfortunately, at this point there’s little you can do about this besides find an exchange that is a bit more reasonable with this regard than others. Have in mind that, on top of transaction fees, exchanges will likely charge their own additional fees, so you should focus on the total costs.  

To sum up: Bitcoin fees are currently very expensive, but this will likely get better in a few months. But even right now, by choosing the right wallet and making sure you use the optimal fee, you’ll do a lot better than just paying whichever fee you’re offered. 

The author of this text would like to thank Luka Zubović for his suggestions and corrections. 

Disclosure: The author of this text owns, or has recently owned, a number of cryptocurrencies, including BTC and ETH. 

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