When you’re reading this article, you may have already bought some digital assets. If you have, congratulations on that!
One of the things we get asked about is why there are so many fees involved when buying, selling, sending, and swapping cryptocurrencies. Why do we pay these fees, and where do they go?
In this guide, we will be breaking down all the fees so that you know exactly what you’re paying for and how you might be able to pay less in the future.
In the first part, we will break down network fees, which are paid to blockchain miners, and a central part of how these decentralized systems work. In the second part, we will explain the different platform and trading fees centralized exchanges charge their customers. Finally, we will share some suggestions on how you can reduce and optimize the number of fees you pay on your crypto journey.
Without further ado, let’s get started.
Cryptocurrency network fees
In crypto, just like in the traditional banking and finance worlds, there are fees users need to pay to send and receive funds and to exchange currencies for one another. However, crypto introduces a new type of fee, which can be difficult to wrap your head around if you’re a first-time user: network fees.
In our other guides about Bitcoin and Ethereum, we discussed the rewards miners get for securing the blockchain network itself. In addition to these rewards, they also receive fees from users who want their transactions processed.
So, when you send a transaction on a blockchain, whether it’s Bitcoin, Ethereum, or any other cryptocurrency, you always pay a fee to the miner who includes that transaction in a block. You can see it as a tip, which can be adjusted higher or lower, depending on how urgent you want your transaction processed. We’ll cover this in detail later on in this guide.
Now that we mention blocks, you also learned how transactions get packed into blocks and are validated by miners. With Bitcoin, for example, a new block is mined and validated every 10 minutes. With Dogecoin, a new block is mined and validated every minute.
The most important thing to understand is that blocks are limited in size and, thus, can only fit a certain number of transactions in each new block.
Blockchain transaction limits
You might wonder why these limits exist. The answer isn’t simple, and it depends on the blockchain in question. The short answer has to do with the fact that blockchains are decentralized rather than stored on the database of a centralized company like a bank or PayPal.
Because transactions need to be synchronized in real-time across thousands of computers worldwide, there are limits to how many transactions can be included in every block. The good news is many intelligent people are working on this problem and finding innovative ways to pack more and more transactions into blocks.
If we stick to the premise that there is a limited amount of space and, thus, a limited number of transactions that can be added to a block, we conclude that people must compete for that limited space.
Therefore, transaction fees are a function of supply and demand. If more people want to make transactions at any given time, the transaction fees will go up because people compete for who can get their transaction in the next block.
For example: imagine a blockchain with only enough space for ten transactions per block, but 15 people are trying to get their transaction through. We now run into a problem because there isn’t enough space.
5 of those people are willing to pay a transaction fee of $0,50, 5 others are willing to pay a transaction fee of $0,25, whilst the remaining 5 people only want to pay $0,10.
Because miners get to choose which transactions get added to a new block, they will logically choose the 10 people who are offering the most. The remaining 5 people will have to wait until the next block.
The cryptocurrency fee market
What we just described is called the cryptocurrency fee market. The good thing is that the fee doesn’t change if you’re trying to send more money. In contrast to a bank, fees are not related to the amount of money being sent. In April 2020, one of the most significant Bitcoin transactions in history was for over 1 billion BTC, costing less than $5 in fees.
With smart contract blockchains like Ethereum, fee calculations can be more complex and also depend on the complexity of the operation. Simple transactions where Ether is sent from one address to another will incur lower fees, whilst transactions that involve interacting with decentralized applications will have higher transaction fees, typically 3 to 5 times as high as simple transfers.
For example: sending stablecoins like USDC, and lending and borrowing money on AAVE, costs more than ‘simple transactions.’
Ethereum fees are often referred to as Gas Fees. As of writing this guide, the average Bitcoin transaction fee is about $5. However, there were times Bitcoin was in really high demand, and fees surged to $30 to $60.
Right now, Ethereum fees are about the same, but there were also times when Ethereum transactions cost close to $100.
Other newer generation blockchains (called Layer 1’s or L1s) like Cosmos, Solana, Binance Smart Chain, and Polkadot have much higher transaction throughput, and fees rarely go above a few cents.
New platforms built on top of Bitcoin and Ethereum increase the effective number of transactions those networks can support and are called layer-2 solutions. The Bitcoin Lightning Network, for example, allows a much higher number of near-instantaneous transactions at fractions of a cent per transaction. On the Ethereum network, several layer-2s are promising to increase transaction speed and throughput.
Although this all sounds a bit complicated, here is what matters the most: it’s all transparent in your wallet. Before confirming any transaction, your wallet will show you the estimated transaction fees. Most wallets will allow you to choose the fee you’re willing to pay.
If you’re in a hurry, you can determine a higher fee and have a higher chance of being added to the next block. If the transaction can wait, you can pay a lower fee and get added to a later block.
Platform and trading fees
Now, let’s discuss platform and trading fees: transaction fees you will encounter when dealing with any crypto exchange or trading platform. These are the fees companies charge for the services they provide.
As discussed in our Buying Bitcoin guide, exchanges are closed systems operated by centralized companies. There are several fees these companies charge their customers for all operations.
Some exchanges hide these fees, giving you the wrong impression that they’re offering a better rate than they actually are, and sometimes they charge much more than a fair fee simply because they can. As long as your money is in their exchange, they’re ultimately in control of it.
We don’t want to refrain you from using exchanges. We use exchanges ourselves to buy and sell digital assets, and millions of others do so as well. However, before buying and selling digital assets on an exchange, it is important to research the company’s fee structure.
The different fees you should look out for
- Processing fees – When buying crypto with a credit card, there are usually processing fees that get added to the transaction. You will see a summary of these before you confirm the transaction.
- On-ramp and off-ramp fees – are the cost of sending money between a bank account and a crypto exchange. These are sometimes called on-ramp or off-ramp fees because the exchange serves as a way to get fiat money on or off the crypto ecosystem.
- Trading fees – Once you’ve sent money to an exchange, they will charge fees for buying and selling crypto with fiat currencies. For example, if you buy or sell Bitcoin for USD, the fee is typically a percentage of the total amount you want to convert. Depending on the exchange, it can range from less than a percent to several percentage points. When you are transacting large amounts, these fees can quickly add up. You will also be charged trading fees when trading crypto-to-crypto. In most cases, crypto-to-crypto fees are lower than those charged for crypto-to-fiat trades.
- Withdrawal fees – Exchanges may also charge high fees when withdrawing crypto from the platform to a wallet, and this is where a lot of people get in trouble. They don’t have many alternatives if they want to get that crypto out of the exchange. Always check withdrawal fees before signing up at a cryptocurrency exchange and making any deposits.
Our 5 top tips to reduce cryptocurrency fees
Here are our 5 top tips that help you pay fewer fees when buying, trading, or selling cryptocurrencies.
Be aware of exchanges
Before using an exchange like Coinbase, Binance, Bitstamp, or Kraken, check its fee structure. You can usually find this information in the customer support section of their website. We cannot emphasize this enough – many times, exchanges sound great until you want to withdraw your funds. This is when you run into very high withdrawal fees you must pay if you want to move your crypto anywhere else.
Try buying, trading, exchanging, and withdrawing a small amount from an exchange before you jump head in with large sums of money. This way, at least, you’ll know what to expect and where they might be hiding additional fees. Also, keep in mind that exchanges usually have a tiered fee system. $500 might not be too expensive, but $5,000 or $50,000 can put you in a much more expensive fee tier and might even limit how much you can withdraw on a daily or monthly basis.
Use exchanges with low trading fees or trading fee discounts
A trading fee discount is like a loyalty point you get every time you make a trade, which you can then use to pay for future transaction fees. Be careful that the costs don’t outweigh the benefits of the exchange’s withdrawal fees.
Favor crypto-to-crypto trades over crypto-to-fiat trades
The first are usually cheaper. If you’re selling fiat currencies like USD or EUR because you want to protect yourself against volatility, consider selling your crypto for a stablecoin, a cryptocurrency whose price is pegged to that of the USD. We will discuss stablecoins in a separate guide, but you may have heard of ones like USDC, which is connected to Coinbase, or GUSD, which is backed by the Gemini exchange.
Execute transactions when network congestion is low
And thus, when transaction fees are low. Some websites will help estimate Bitcoin and Ethereum transaction fees. As a general rule of thumb, transaction fees are lower on Saturdays and Sundays.
Determine the urgency of your transaction
Some crypto wallets, like Zengo, allow you to decide how urgent your transaction is. If you want it done now, you’ll have to pay a higher fee. If you don’t mind waiting, you can tell the system you’re not in a rush and to execute transactions when fees are lower. It’s pretty cool to see that in action!
Crypto transaction fees – conclusion
We hope this guide gave you a better understanding of the different types of fees you will encounter in your crypto journey. It’s always a good idea to choose the option with the lowest fees. When considering the cost of fees, we always look at it like this: how much will these fees cost me in the future? In other words, what will the crypto I’m losing by paying this fee be worth in the future if the price of this crypto appreciates to where I think it might? From this perspective, you might realize that the $5 fee you paid today could be worth a few hundred dollars in the future. Add those up, and that’s less money in your pocket.
Unfortunately, fees are a central part of the crypto ecosystem. But, unlike traditional banking, we find crypto fees to be much more transparent, as long as you know where to look! Taking a few minutes to learn about these fees can save you hundreds or even thousands of dollars, so we are glad you took the time to read!
