Bitcoin is a decentralized digital currency based on blockchain technology with an overall value approaching $1 trillion. Currency can be exchanged without an intermediary like a bank or payment processor and there’s no central government or central bank in charge of creating new currency or affecting its value.
But that doesn’t make Bitcoin transactions free.
Related: How to invest in Bitcoin
What are Bitcoin Fees?
There are two types of Bitcoin fees and costs. Most exchanges and brokerages will charge a fee for trading Bitcoin (as they would charge a fee on any other trade), and on top of that, there are also Bitcoin transaction fees.
How Do Bitcoin Transaction Fees Work?
When a Bitcoin transaction occurs, the network usually keeps a small percentage of the transacted amount.
Traditional bank or money transmitters might charge a fee on a transaction to help pay for the cost of maintaining the network, increase profit margin for the company, protect against legal or reputational risk by working with the customers that are transferring money, or to cover the risk of having to reverse the transfer or have it not be accepted.
For Bitcoin, much of this does not apply — there’s no company that controls the network and the transfers are final and irreversible. So why are there Bitcoin transaction fees? The Bitcoin fees exist because the Bitcoin network is maintained by its users and because Bitcoin mining needs to be incentivized by the system itself.
Bitcoin miners, which are essentially networks of computers that power the network through “proof of work” (i.e. solving hard math problems), maintain the network and power through the transactions. The more computing power coursing through the network, mining new blocks of Bitcoin, authorizing and authenticating transactions, the higher the Bitcoin hash rate. That’s a good thing, and to fund this, incentives are required.
Bitcoin miners are incentivized in two ways: they earn new Bitcoin through mining, and they earn transaction fees.
Why Do Transaction Fees Go Up and Down?
Transaction fees depend on several factors, but the most important one is the overall use of the Bitcoin blockchain. Basically, it’s a matter of supply and demand. When there is a relatively large amount of computer power dedicated to mining a relatively small amount of Bitcoin transactions, fees go down.
When there are lots of transactions being initiated simultaneously, fees can go up, as the network can only process so many at any given time. Miners will work harder to authenticate and process transactions with higher fees.
3 Strategies to Save on Bitcoin Transaction Fees
There are ways to save on Bitcoin transaction fees. While you may not avoid them outright, these strategies may help you incur smaller fees.
1. Know What You’re Paying — or Will Pay
The first step to avoiding high Bitcoin transaction fees is to know exactly what they are. Websites like BitInfoCharts are dedicated to tracking Bitcoin transaction or transfer fees, and these fees are also a frequent topic of conversation and news coverage in the cryptocurrency-focused media. So it’s possible to keep track of fees and wait to do a transaction when the fees are lower.
2. Use a Wallet With a Set Fee
Bitcoin transactions happen through a crypto wallet — the software or hardware that allows you to store, send and receive Bitcoin. Many popular, mainstream exchanges also have wallets and will calculate and pass on Bitcoin transaction fees.
There are a variety of wallets that allow you to set your own fee — though that can mean that a transaction you wish to make may not be prioritized or go through immediately. This may not be important to you if you’re doing a small number of transactions or just one transaction, but the option may be valuable if you’re looking to save on Bitcoin transaction fees.
Recommended: Cold wallet vs. hot wallet: Choose the right crypto storage
3. Use the Lightning Network
Bitcoin transactions are slower and more expensive than many transactions that happen with fiat currency like U.S. dollars. To fix this, a group of developers created the Lightning Network, a protocol that sits on top of the blockchain and allows users to transfer Bitcoin much faster and with far lower fees than normal, “on-chain” transactions.
Using Lighting Network for transactions has not yet reached mass adoption in the Bitcoin community, largely because it’s more complicated and requires more technological know-how than typical transactions. However, for anyone with that know-how who’s doing frequent Bitcoin transactions or transfers that are time-sensitive, it may be an option to reduce Bitcoin fees.
The Takeaway
The problem of Bitcoin transaction fees is a long-lamented subject in the Bitcoin community. But the way the network is set up, these fees are a necessary evil. They incentivize miners to devote computer power to verify the transactions and keep the blockchain growing.
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This article
originally appeared on SoFi.com and was
syndicated by MediaFeed.org.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
<h2>More from MediaFeed:</h2>
<h1>Cold wallet vs. hot wallet: Choose the right crypto storage</h1>
In traditional finance, money is kept in a bank account, whereas in cryptocurrency, money is kept in an individual “wallet,” some digital, some paper. Like traditional bank accounts, there are cold wallets and hot wallets, each with its distinct uses and advantages.
To choose which type of wallet is right for you — a cold wallet or hot wallet — it can be helpful to compare which features best suit your crypto storage needs.
In this article, we will explore all the aspects of each type of wallet:
- What is a cold wallet?
- What is a hot wallet?
- Cold wallet vs. hot wallet: which is right for you?
Related: Digital assets and cryptocurrency
dulezidar / istockphoto
A cold wallet is a digital wallet that allows users to store cryptocurrency offline. The wallet only ever accesses an internet-connected device when the user needs to send or receive funds using the wallet. This makes it an exceptionally secure option for crypto holders.
Unlike traditional currencies, cryptocurrency is not held nor protected by a bank or central governing body thus giving the user full authority over their funds. However, cryptocurrency must be kept somewhere, so individual wallets were created.
Below is an overview of the types of cold wallets.
Velishchuk / istockphoto
A hardware wallet is a digital wallet that allows users to store cryptocurrency on a physically-detachable device. When the hardware wallet is not in use, it remains disconnected from any other device, disabling any internet, local area network or physical transferability.
When the user needs to send or receive funds using the cold storage wallet, the device connects to an internet-connected computer via a USB cable. Even then, the wallet is only accessible with the correct private key which is generated offline. This adds another layer of security to the already multi-layer encrypted security protocol.
Andre Francois on Unsplash
Offline software wallets are similar to hardware wallets but are more complex to set up and use. An offline software wallet separates a wallet into two platforms — an offline wallet containing the wallet’s private keys and an online wallet containing the public keys.
The online wallet and offline wallet function separately to initiate new transactions that must be manually processed incrementally by the user. This allows transactions to be sequentially processed without the offline wallet ever connecting to the internet, securing its stored private keys.
Jirapong Manustrong / istockphoto
A paper wallet is the most basic form of cold storage. It is an actual paper document with the public and private keys written or printed on it, using an offline printer. A paper wallet typically features a QR code to be easily scanned and signed to process transactions.
Paper wallets are effective cold wallets; however, they are susceptible to being lost, damaged, illegible, destroyed, copied or stolen, rendering the wallet’s funds irrecoverable.
Cemile Bingol/istockphoto
A sound wallet is an audio device that records and stores a wallet’s private keys in encrypted sound files into mediums such as CDs and vinyl discs. Sound wallets are not common nor popular among cryptocurrency holders, yet they are a viable option for safely storing digital currencies.
To retrieve the keys from a sound wallet, code hidden within these audio files can be deciphered with a spectroscope app or high-resolution spectroscope.
tigerstrawberry / iStock
A hot wallet is an online storage tool that allows owners of cryptocurrency like Bitcoin to send, receive and store cryptocurrency. Hot wallets are cryptocurrency wallets provided by third-party entities and are connected to the internet. Because they are connected to the internet, hot wallets allow for fast and easy transactions at any time, regardless of location.
Upon creating a hot wallet, users are given a unique public wallet address which is shared with others to receive cryptocurrency, similar to a username or bank account number.
A private key for the wallet is also provided, and functions much like a password. Finally, a recovery seed phrase is provided; this is a sequential list of random words similar to a password recovery secret question’s answer.
Despite the name, hot wallets don’t actually store cryptocurrency in the same way traditional wallets do. Hot wallets are primarily used for temporarily holding a small amount of funds used for everyday buying, trading, or transferring cryptocurrency.
These wallets help facilitate any changes to the record of transactions permanently stored on the decentralized blockchain ledger for any given cryptocurrency.
Below is an overview of the different types of hot wallets.
istockphoto
When a cryptocurrency investor creates an account with a digital currency exchange or investing platform, they are provided with a hot wallet protected by the platform. These hot wallets are firmly protected by their respective exchanges, as the company’s success and survival depends on protecting customers’ funds from getting stolen.
Some centralized exchanges may even insure their customers’ funds, providing reimbursement guarantees in the event of a security compromise or loss of funds.
Note that a decentralized exchange, an exchange with no central authority, offers no similar protections and requires users to use their own wallets.
Phira Phonruewiangphing / iStock
A desktop wallet is a computer or smartphone application installed on an internet-connected device that gives the user complete control over their wallet. Desktop wallets have a public address and allow the user to send or receive cryptocurrency, and they also have a private key to protect stored funds.
DepositPhotos.com
Web wallets are hot wallets hosted by a company through a website or a web browser extension. Web wallets facilitate access to cryptocurrency from anywhere and are accessible on web browsers or mobile devices.
Stanislav Palamar/istockphoto
A mobile wallet is similar to a desktop wallet, but is designed for mobile devices such as smartphones or tablets. Mobile wallets allow for mobile payments and transfers in physical stores, via touch-to-pay and scanning of a QR code.
Depositphotos
Because cold storage stores cryptocurrency through an offline medium, it is the strongest form of security and self-custody for protecting cryptocurrency, similar to storing gold in a vault. Since the funds remain offline when not in use, it is nearly impossible to hack or gain unauthorized access to a cold storage wallet. A cold wallet is only susceptible to being physically lost, damaged or stolen.
While hot wallets can be considered “safe,” they are technically more vulnerable to attacks because they are connected to the internet. Maintaining a constant internet connection provides the opportunity, however small, for malicious actors to gain unauthorized access to and steal funds from wallets even when a wallet isn’t actively being used by the owner.
Hot wallets are ultimately secured by the individual user. There are only two ways to access a wallet: A confidential “private key” and a recovery “seed phrase.”
However, hot wallets ultimately have three attack vectors:
- Back-end: Via an unsecured exchange, web wallet company, a bug in desktop wallet’s code)
- Front-end: If the individual wallet owner saves private key in an email which is then hacked)
- Random: Brute force attack
Experienced cryptocurrency investors typically only keep a small percentage of their holdings in a hot wallet to reduce risk, as hackers are less likely to break into a hot wallet for a small sum of tokens. Hot wallets commonly will only have a small amount of tokens planned to be traded, spent, or sold in the near future. Otherwise, the core remaining assets may remain in a cold storage wallet until needed.
SPmemory / iStock
Choosing the right crypto storage can be a difficult task and there might not be one perfect solution. Deciding what kind of wallet to use depends on a multitude of factors such as:
- Accessibility: If the wallet is purely for longer-term storage and will not be used often, a cold wallet with stronger security might make more sense.
- Frequency of use: For someone who needs to access the wallet often for trading, sending, and receiving without much hassle, a hot wallet might be better suited.
- Purpose of use: Spreading cryptocurrency across multiple wallets — with small amounts needed for daily transacting to hot wallets and core holdings not needed for years to cold wallets — can reduce long-term risk and optimize day-to-day transacting.
- Diversity: Individuals are not limited to only one wallet, making it not only possible but potentially advantageous to diversify cryptocurrency investments across multiple wallets.
Pe3check / istockphoto
When deciding where to store your cryptocurrency, it’s important for an investor to consider what’s more important: security or convenience.
A cold wallet is a cryptocurrency wallet stored on a device or medium that is not connected to the internet. Cold wallets are more secure and difficult to attack, but are inconvenient to use and can be damaged, lost or stolen.
A hot wallet is a digital currency wallet stored on an online device that is connected to the internet. Hot wallets are more suitable for investors who actively buy, send, and trade cryptocurrency and need to be able to easily access their wallet from anywhere, though they are more vulnerable to hacks and loss of funds.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Learn more:
- Popular terms every crypto beginner needs to know
- What is cryptojacking? How to detect mining malware
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA, the SEC, and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA /SIPC. SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
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Featured Image Credit: whyframestudio / istockphoto.
