Initially, the cryptocurrency market was a niche market, avoided by most traders and investors, but recently it has become an exciting asset class. To take part in this explosive branch of the trading sphere, one needs to use platforms build for cryptocurrency trading to get exposure, these platforms being similar to those from the equity market. Transaction fees are perceived when we buy, sell or exchange any currency. As with any tax, transaction fees will slightly reduce the total value of an investor’s portfolio.
All investments imply actual costs, not only opportunities for an investor that chooses to give up on an asset in favor of another one. But instead, these costs and comparisons are not so different from the ones buyers confront when buying a car. Transaction fees are expenses incurred when buying or selling a good or service. Transaction costs represent the necessary workforce to bring goods or services to the market, giving birth to entire industries dedicated to exchange platforms.
How do transaction fees work?
Transaction fees are necessary for performing any financial transactions in the 21st century, and cryptocurrency transactions are no exception. Mathematically, transaction fees represent the difference between the sent amount of cryptocurrency and the amount received. Conceptually, transaction fees reflect the user’s desire to speed up the transaction on the Blockchain. Fees work differently, depending on The Blockchain used. Both Bitcoin and Ethereum bind the transaction fee to its dimension, and users can choose to pay extra to speed up the confirmation process. For Bitcoin, the median transaction fee may vary from one day to another, depending on traffic volume and other fundamental factors. The same rules apply to Ethereum.
On Ethereum, every time an operation takes place, a transaction fee is charged, also known as gas. The gas accelerates the transaction because each interaction on the Ethereum Blockchain requires a certain amount of computing resources which constitutes a block. As mentioned above, the more complex and faster the transaction, the more it will cost. For example, a simple transfer from one wallet to another will have reduced costs, while heavier computing tasks, like cryptocurrency swap or NFT minting, require more resources and block space. Thus transaction fees are more significant.
Why do transaction fees exist?
As cryptocurrency transactions have gained popularity and grew in number and complexity, transaction fees were implemented to accelerate validation and confirmation. Collected fees go directly to miners that validate and record transactions to help maintain system flow and functionality. In addition, miners support transactions processing and eliminate spam transactions.
Factors that contribute to transaction fees
Commissions on the Blockchain depend on many factors, including how congested the network is, confirmation time (affected by liquidity providers), and transactions’ size (measured in kilobytes). In other words, it may be necessary to pay hefty commissions and fees for crypto transactions if the Blockchain network that we’re using is busy at the time.
Usually, transaction fees become pricier when the price suffers huge fluctuations and significant global events occur. On the other hand, if the account has many small deposits, the transaction’s size will be more effective because it consists of more inputs. The bigger the transaction size is, the bigger the Blockchain fee. Besides, one can pay extra for the benefit of priority because transactions can be validated quicker if the fee is higher. Even if it seems like a good idea if time is essential, this can take one into a gas war that turns against the user because if some choose to pay excessively, this will oblige miners to increase their fees, automatically growing the cost for users that are not willing to pay extra.
Bigger or smaller transaction fees can significantly reduce our profits and affect our wins and losses. Although these transaction fees are a necessary part of digital assets, we can mitigate general costs and the risk of paying unnecessary extra, regardless if it means choosing an alternative network or waiting for the ideal moment to process the transactions.
Paying attention to these transaction fees and knowing how to manage them can save you time and money. What’s important when choosing a crypto exchange is transparency, because fees should never be hidden from the user. On Your Friendly Crypto Exchange, you have zero hidden fees to worry about, guaranteed. Join IXFI and take your trading to the next level.
Disclaimer: The content of this article is not investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product. It is for general purposes only and does not take into account your individual needs, investment objectives and specific financial and fiscal circumstances.
Although the material contained in this article was prepared based on information from public and private sources that IXFI believes to be reliable, no representation, warranty or undertaking, stated or implied, is given as to the accuracy of the information contained herein, and IXFI expressly disclaims any liability for the accuracy and completeness of the information contained in this article.
Investment involves risk; any ideas or strategies discussed herein should therefore not be undertaken by any individual without prior consultation with a financial professional for the purpose of assessing whether the ideas or strategies that are discussed are suitable to you based on your own personal financial and fiscal objectives, needs and risk tolerance. IXFI expressly disclaims any liability or loss incurred by any person who acts on the information, ideas or strategies discussed herein.
