Introduction
Imagine you’re trading cryptocurrency for the first time. You find your desired bid or a certain cryptocurrency and proceed with the transaction. Then you see a list of additional charges while making a transaction and now you’re clueless and confused.
The concept of money and financial transactions has been significantly altered by the advent of cryptocurrencies. One feature of this dynamic environment that never fails to attract attention is the ever-changing nature of transaction costs. Any serious crypto investor or fan must have a firm grasp of the mechanics behind high crypto transaction fees.
We shall briefly discuss what are high crypto transaction fees in this series of “Dumb Ways To Lose Money”. We shall also underline the vital need of maximising cost effective transactions during peak transaction times. Let’s explore further.
What Are Cryptocurrency Transaction Fees?
Transaction fees are like small charges you pay when you use cryptocurrencies to make transactions on their networks. These fees serve crucial functions-
- They discourage people from flooding the network with lots of small, less important transactions. This helps keep the network working smoothly.
- They give a reward to the miners and validators who are responsible for checking these transactions. Miners like transactions with higher fees because they earn more money from them.
- Fees help decide how fast your transaction gets processed. If you’re in a hurry, you can pay more for faster processing. If you’re not in a rush, you can pay less and wait a bit longer.
- When lots of people want to use the network at once, higher fees can encourage some to wait or use a different network. This helps avoid network jams.
These fees are usually in the same cryptocurrency you’re using, like Bitcoin for Bitcoin or Ether for Ethereum. You can choose how much fee you want to pay, depending on how quickly you need your transaction to happen. Different cryptocurrencies have different rules for fees, so it’s good to know how they work for the one you’re using.
Scaling solutions and Layer 2 solutions, such as the Lightning Network for Bitcoin and Optimistic Rollups for Ethereum, can significantly reduce transaction fees. These solutions enable more transactions to be processed off-chain or in a more efficient manner, often at a lower cost.
What Are Crypto Gas Fees?
Crypto gas fees are specific fees associated with smart contract blockchains, and they were first introduced by Ethereum, a pioneer in smart contract technology. Nowadays, many other blockchains like Solana, Avalanche, and Polkadot also use similar fee systems.
When you use these blockchains, you’ll notice something called ‘gas fees’’ before you confirm your transaction. These fees are different from regular transaction fees and are paid using the native cryptocurrency of the blockchain. For instance, on Ethereum, you pay gas fees with ETH, while on Solana, you use SOL tokens.
Gas fees are important because they compensate the validators or miners who make sure the blockchain works correctly and securely. Whether you’re sending cryptocurrency to a friend, creating something unique like an NFT, or using services in the decentralised finance (DeFi) world, you’ll come across gas fees, and it’s your responsibility to cover these costs.
Types Of Transaction Fees
Transaction fees are like tolls on the cryptocurrency highway. They assist to safeguard the network and encourage miners to execute your transactions. Let’s have a look at some important cryptocurrency transaction fees that you must know.
Cryptocurrency Exchange Fees
When you buy or sell cryptocurrencies, you’ll encounter two types of fees, i.e., trading fees and withdrawal fees. Trading in advanced markets like futures and leveraged options involves dealing with more complex fee arrangements, including elements like interest rates and funding rates.
Trading Fees
Trading fees can be calculated as a fixed percentage of the crypto amount you’re buying or selling. Some exchanges differentiate between makers and takers, charging different percentages accordingly.
Makers are traders who add liquidity to the exchange by placing orders that don’t immediately match existing ones. In comparison, takers remove liquidity by executing orders waiting in the exchange’s order book.
Makers usually pay slightly lower fees than takers, but this can vary between exchanges. It’s important to note that you can’t choose whether your order is a maker or taker. Instead, focus on overall fees and any discounts available for trading a certain amount each month or holding the exchange’s native cryptocurrency.
Some crypto investment apps claim to have zero fees but charge a spread, which is the difference between their buying and selling rates. Spreads can sometimes end up being more costly than paying a percentage-based trading fee.
Deposit/Withdrawal Fees
Many exchanges impose fees when you withdraw your coins from their platform. This can be a concern if you prefer to move your crypto to a secure external wallet or another exchange. Withdrawal fees typically vary depending on the cryptocurrency.
If you plan to move your crypto out of an exchange frequently, you can consider choosing a platform that offers a certain number of fee-free withdrawals, like Gemini.
Other Fees
For those involved in advanced trading strategies such as margin trading, there may be extra fees associated with borrowing funds. Some beginner-friendly exchanges, like Coinbase and Gemini, offer quick buy options with higher fees.
You can avoid these by learning how to trade on the exchange’s platform. If you make crypto purchases using a credit or debit card, both the exchange and your card issuer may charge you extra fees. That’s why it’s often better to buy crypto using cash or wire transfers.
Blockchain Wallet Fees
Cryptocurrency wallets can involve various fees depending on the services and transactions you perform. Firstly, there’s the network fee, which is the primary cost for using the blockchain network itself. This fee compensates miners or validators and is paid in the native cryptocurrency of the blockchain you’re using.
If your wallet is connected to a cryptocurrency exchange, you might encounter an exchange fee separate from the network fee, retained by the exchange as revenue. Wallets operating independently from cryptocurrency exchanges often levy their own fees for deposits and withdrawals.
However, if you’re converting between different cryptocurrencies within the wallet, you could incur a conversion fee based on the conversion rate. Additionally, certain wallets offer the option to choose transaction speed, where opting for faster confirmation may come with a higher fee while selecting a slower confirmation might result in a lower fee.
It’s important to be aware of these fee types and customise your wallet settings accordingly to optimise your cryptocurrency management experience.
Strategies To Minimise Transaction Costs
You could reduce transaction costs by picking the correct network and timing your transactions. Let’s explore a few methods.
Choosing The Right Exchange
When picking a cryptocurrency exchange, remember it’s not just about fees.
- Consider security, as cryptocurrencies are targeted by hackers.
- Diversify investments across exchanges or use a secure offline wallet for added safety.
- Ensure the exchange supports the specific cryptocurrencies you intend to buy or trade.
- Look for exchanges with high liquidity to improve trading efficiency and reduce price manipulation risk.
- Examine the fee structure, including trading, withdrawal, and deposit fees, to align with your budget and trading frequency.
- Seek out user-friendly interfaces and intuitive trading platforms for a better trading experience.
- Evaluate the responsiveness and quality of customer support for addressing technical issues or concerns.
- Consider exchanges that offer educational resources, especially if you are new to cryptocurrency trading.
- Check if the exchange operates in your geographical region, as some have location-based restrictions.
- Confirm if the exchange provides advanced trading tools like margin trading, limit orders, or chart analysis.
- Research the exchange’s reputation, user reviews, ratings, and past security incidents before making a decision.
Timing Your Transactions For Cost Effectiveness
One approach is to time your transactions strategically to avoid high transaction costs. Cryptocurrency networks often experience fluctuating transaction fees due to changes in network demand. Sending transactions during periods of lower demand, such as late at night or on weekends, can result in lower fees.
So, when’s the best time to avoid these fees?
Generally, blockchain networks are busiest when people in the U.S. are awake because that’s where many cryptocurrency users are. Weekends, especially Saturdays, tend to have less activity and lower fees.
Also, how quickly you want your transaction to be confirmed affects the fees. If you need it fast, you might have to pay more. If it’s not urgent, you can choose slower confirmation and pay less.
Choosing The Right Cryptocurrency For Your Transaction
Different cryptocurrencies have varying fee structures. Some have significantly lower fees than others. Selecting a cryptocurrency with lower fees for your specific transaction can help save costs. Here are a few cryptocurrencies which have low transaction fees:
- Ripple– Known for its low transaction costs and fast cross-border payments, making it suitable for international transfers.
- Stellar– Distinguished for its low transaction fees, with every transaction costing just 0.00001 XLM.
- Cardano– While not the cheapest, Cardano still offers relatively low transaction fees compared to other major cryptocurrencies.
- IOTA– Recognised for being eco-friendly, IOTA charges no transaction fees and doesn’t rely on miners.
- Litecoin– Offers low transaction fees of around USD 0.007, making it an affordable choice.
Safe Fees
When you have a cryptocurrency wallet, you can save money by doing two things.
First, pick a wallet that helps you choose the right fee level for your transactions, ensuring you don’t overpay or experience delays due to low fees.
Second, setting appropriate transaction fees is paramount. Too high, and you spend more than necessary; too low, and your transactions might languish. When using MetaMask or any other cryptocurrency wallet, striking the right balance between fee optimisation and security is paramount.
It might be tempting to lower gas fees (transaction fees) to reduce costs when conducting cryptocurrency transactions. If you set your gas fees very low, your transactions might get stuck in the mempool.
As a consequence, your transactions may experience delays or, in some cases, fail to confirm altogether. This situation can be frustrating and may lead to potential financial losses. To avoid this situation, it’s important to set gas fees that are appropriate for the current network congestion and the priority of your transaction.
Conclusion
Successfully navigating the challenges posed by high crypto transaction fees is essential for anyone involved in the world of cryptocurrencies. If you’re an investor, trader, or just using cryptocurrencies for transactions, it’s really important to get a hang of what drives those high fees and to find ways to keep those costs down.
Timing your transactions, choosing the right blockchain, and exploring alternative networks are valuable approaches. Additionally, leveraging scaling solutions and Layer 2 solutions can significantly reduce fees and improve transaction efficiency. By implementing these tactics, people can thrive in high crypto transaction cost settings and continue to participate with cryptocurrencies successfully.
We conclude this series of ‘Dumb Ways To Lose Money’ by letting you know to be informed while making a cryptocurrency transaction. Stay safe and make the most cost-efficient transaction.
