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How do cryptocurrency transaction fees work?

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Understanding cryptocurrency transaction fees is essential for anyone looking to acquire these digital assets or get involved in decentralized finance. As cryptocurrencies swiftly make their way into the portfolios and wallets of mainstream consumers, the number of people deciding to leverage their funds and transact in cryptocurrencies is increasing fast. 

For those who do decide to use their digital funds to transact, make cross-border payments, or purchase products and services, it is important to be aware that each transaction is subject to a network fee. This fee represents the resources (human time and energy, as well as computational power) needed to process the transaction and enter it into the blockchain. Each network sets a base fee for each transaction, but there are other factors that come into play when determining how much a transaction will cost. 

For merchants considering whether to accept cryptocurrencies as a form of payment, it is important to understand why transaction fees exist, how they work, and why they may vary. Wrapping your head around the world of cryptocurrencies and blockchain is a lot easier than many people think, especially when we break down the whos, the hows, and the whys. 

What are cryptocurrency transaction fees?

Cryptocurrency transaction fees, also known as gas fees, play an important role in maintaining the efficiency, security, and integrity of each blockchain. When blockchain technology and Bitcoin were first created back in 2009, Satoshi Nakamoto introduced transaction fees with a view to preventing spam transactions and malicious activity within the network, which could lead to unnecessary congestion. But these fees also serve as incentives for blockchain miners to power to verify, process, and add transactions to the blockchain in question (Bitcoin, Ethereum, etc.). Ultimately, they help sustain a healthy and competitive market, whereby users can decide to pay more in order to push their transaction up the list of priorities. 

How are transaction fees calculated, and why do they vary?

Each network, whether it’s Bitcoin, Ethereum or Solana, sets a base fee per transaction. However, the final cryptocurrency transaction fee charged to the user is calculated by taking various other factors into consideration, namely the computational complexity of the transaction, its urgency, and the level of network congestion. Transactions that are more data-intensive or computationally complex will incur a higher fee. In Ethereum, for example, where it is also possible to execute smart contracts, users can be charged higher transaction fees (or gas fees, as they are known on Ethereum) for transactions that are more complicated to process and consume more resources. Transactions that need more space in a block, such as those involving larger data sizes, also tend to incur higher fees. 

The cost of a cryptocurrency transaction will also be determined by how fast the user wants it processed, in other words, its urgency. Users who want to fast-track their transactions must be prepared to pay a higher fee, as an incentive for miners to prioritize their transaction and enter it into the next available block. As we mentioned above, this system helps maintain a competitive market where users enter into a bidding war to move their transactions up the list. Just like any network, blockchains experience peaks and troughs of traffic throughout the day, week, and month. During particularly busy periods, urgent transactions will require higher fees, given the higher demand for block space and miners’ time and resources.

Crypto transaction fees compared to traditional financial services

In some countries, traditional transactions can incur fees amounting to 15% or 20% of the amount being sent, especially when it comes to making cross-border payments. Cryptocurrencies offer a much cheaper railway through which to send funds. Unlike traditional financial services, cryptocurrency transaction fees are not necessarily determined by the transaction value. On any given day, it may cost $2.20 USD to send funds over the Bitcoin network. However, at exactly the same time, it could cost less than $0.01 USD to send the same amount of value over the Litecoin network. By way of example, in early 2022, the average Bitcoin trade was worth around $700,000 USD, for which the average network fee was approximately $0.50. 

ForumPay’s all-inclusive transaction fee

Merchants thinking about starting to accept cryptocurrencies as payment should be aware that at ForumPay, we charge one all-inclusive fee per transaction, which depends on the type of processing that the merchant uses, transaction volume and average transaction value. It can also be fully or partially passed on to the consumer as a convenience fee. The fee includes a conversion rate that is updated in real time, instant transaction approval, a verification of the crypto via Chainalysis, the conversion into FIAT or another crypto and also settlement to the receiver’s crypto wallet or bank account. We support blockchains that incur very low fees, as well as the major, more popular networks, where mining fees tend to be higher. There are no setup, ongoing, or other hidden fees. Merchants only pay when they transact, and unlike cards, there is no fraud, chargebacks, or PCI-DSS compliance costs.

In short, there is a significant difference between sending funds over the blockchain and moving money through traditional financial services such as banks or transfer platforms, especially when it comes to cross-border payments. 

If you are a business and have yet to start accepting payments in cryptocurrency, book a meeting with one of our crypto payment experts to find out more. They are available to answer all your questions. Alternatively, visit forumpay.com for more information.

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ForumPay does not disclose financial advice. Anything shared is strictly to inform, entertain, or share thoughts and ideas. Please seek a registered financial advisor if you are looking for financial advice.

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