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Oct

2021

What is a Private Blockchain? Public vs Private Blockchain

What is a Private Blockchain and How Does It Work?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

The term “blockchain” most often implies a public blockchain. The Bitcoin blockchain, the first ever created, is a public blockchain, and for a time it seemed like all blockchains functioned the same.

But in the 12 years since the creation of Bitcoin, many individuals and organizations have experimented with different versions of blockchain technology. As a result, the answer to the question “what is blockchain” has become somewhat more complicated. In this article, we will examine the differences between a public vs private blockchain.

Basics of Blockchain

Blockchain technology is a form of decentralized ledger technology (DLT). A distributed ledger consists of multiple servers that can be spread across different geographical regions. The ledger can be used to record transactions or other information without relying on a single computer.

A blockchain is unique in terms of DLT in that blockchains are decentralized, permissionless, and create an immutable public record of transactions. The servers in a blockchain are referred to as “nodes,” which are computers that make sure everyone on the network agrees on the blockchain’s history, a feat known as “consensus.” At least, that’s the case for the Bitcoin blockchain, which was the first ever created.

Since the launch of Bitcoin in 2009, many variations of the original blockchain technology have sprung up. Some are more centralized, require permission to use, or use different consensus mechanisms.

Recommended: What Happens When Bitcoin Forks?

What is a Public Blockchain?

A public blockchain is one that is decentralized, can be used by anyone, and maintains a public ledger of all network activity.

Bitcoin is a good example of a public blockchain. All Bitcoin transactions are recorded on the blockchain and can be seen by anyone using a simple block explorer like blockchain.info. There are also more advanced tools, like those created by companies such as Chainalysis, that can analyze blockchain data for more specific details. Those details can be useful for finding illicit transactions or hacked coins, for example.

Bitcoin is also a permissionless blockchain, meaning anyone can use it without needing permission. This makes the network equitable in that there are very few barriers to entry. All anyone really needs to initiate a Bitcoin transaction is either a home computer or a smartphone and a Bitcoin ATM.

What is a Private Blockchain?

A private blockchain can be thought of as the opposite of a public blockchain. It’s kind of like a personal blockchain for whoever runs it.

Rather than a decentralized network of nodes achieving consensus on a network that can’t be owned or controlled by any single person or group, private blockchains represent a different kind of system.

Private blockchains are more like centralized distributed ledgers. Some might even argue that they are not blockchains at all, given that decentralization is often thought to be a key feature of blockchain technology.

How Do Private Blockchains Work?

Rather than being decentralized, a private blockchain is owned and controlled by one person, group, or organization. This party will control:

• who can participate in the network (users must be invited and verified, meaning that private blockchains are also permissioned blockchains)

• how consensus will be achieved between the nodes

• how mining rights and rewards will be distributed

• how the ledger will be maintained

Whereas public blockchains create an immutable ledger, the owner of a private blockchain can override, reverse, or delete transactions as they see fit.

When it comes down to it, a private blockchain is a distributed ledger that functions as a closed database based on cryptography. The only parties who can run full nodes on a private blockchain are those that have received permission from the owners of the network.

Readers interested in learning more about a specific private blockchain example could research projects like Ripple, Quorum, or Hyperledger Fabric.

Recommended: What is Ripple XRP?

Pros and Cons of Private Blockchains

Private blockchains offer some pros and cons that are distinct from those of public blockchains.

Pros of Private Blockchains

There are a number of pros of private blockchains, including potentially lower energy usage, higher transaction throughput, and more control over unwanted network activity.

Lower Energy Usage

The computing power required to run thousands of nodes around the world to achieve consensus on a public blockchain can add up to a significant amount. In contrast, centralized private blockchains use less energy because they run on just a handful of servers.

Ability to Remove Unwanted Activity

A private blockchain gives its owner the ability to reverse or delete transactions. So, if someone steals funds or information, that problem can be solved easily.

Faster Transactions

Private blockchains can scale more easily than public ones. The number of authorized participants will be much less in a private blockchain, allowing it to process many more transactions per second than a public blockchain.

Cons of Private Blockchain

There are a few downsides to a private blockchain, both of which trace back to its centralization.

Potential for Censorship

Private blockchains face the same challenge as all centralized systems: They require users to put full faith in whomever runs the system. If that person or group decides to take actions that benefit themselves and hurt network participants, there is often little anyone can do. And if the network operators want to exclude certain people from participating in the network for whatever reason, they can do so.

Decreased Security

Private blockchains may be seen as less secure because they create a single point of potential failure. If attackers can seize upon this single attack vector, the network could be in big trouble. Public blockchains, in contrast, have greater blockchain security because controlling the network requires controlling 51% of the network’s nodes.

Recommended: What is a 51% Attack?

Public vs Private Blockchains: Main Differences

In many ways, the distinctions between a public and a private blockchain are easy to point out because they are polar opposites. Here is a recap of their main differences.

Public Blockchain	Private Blockchain
Anyone can run a full node.	Only selected participants can run a full node.
No one needs permission to use the network.	Only selected participants can use the network.
An immutable public ledger is maintained in a decentralized manner.	The ledger can be altered by the entity that controls it.
It’s owned by no one.	It’s owned by a single centralized entity.

Is a Public or Private Blockchain Better?

There is no definitive answer as to whether a public or private blockchain is better.

Private blockchains might have some specific use cases in private industry. But because they can be centrally controlled, some might argue that private blockchains defeat the entire purpose of blockchain technology.

Yes, a private blockchain could consume less power, enable faster transactions, and give greater privacy to its users. But the tradeoff is that power becomes concentrated into the hands of whoever controls the network, and they can change the rules anytime they like.

An open, public blockchain like the one that Bitcoin runs on is the most equitable approach and makes the system nearly immune to censorship or corruption. No one can stop someone from using Bitcoin, and no single person or entity can control Bitcoin. Changing the rules on a decentralized network requires a majority of nodes to come to an agreement.

The Takeaway

Public and private blockchains couldn’t be more different from each other. And while the permissioned approach of private blockchains may result in higher speed and efficiency, it can also come with a higher potential for corruption.

Photo credit: iStock/anilakkus

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Oct

2021

What Is a Credit Spread? Explained and Defined

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

The term “credit spread” refers to two separate financial terms.

A credit spread is an important indicator of investor sentiment that compares the yields offered by Treasuries and corporate bonds as a way of understanding how optimistic or risk-averse investors are feeling.

But credit spread also refers to an options-trading strategy where an investor sells a high-premium option and simultaneously purchases a low-premium option on the same underlying security.

Credit Spread – the Market Indicator

A credit spread is the gap between the interest rate offered to investors by a U.S. Treasury bond versus another debt security with the same maturity. The differences in the yield of the different bonds, or credit spread, typically reflects differences in credit quality between Treasuries and other bonds.

Investors will also sometimes call credit spreads “bond spreads” or “default spreads.” For investors, credit spreads give investors a quick shorthand for comparing a particular corporate bond versus its risk-free alternative.

When investors refer to credit spreads, they usually describe them in terms of basis points, each of which is a percent of a percent. For example, a 1% difference in yield between a Treasury bond and a debt security of the same duration would be called a credit spread of 100 basis points.

For example, if a 10-year Treasury note offers investors a yield of 3%, while a 10-year corporate bond offers to pay investors a 7% interest rate. There would be a 400 basis-point spread.

Recommended: What is Yield?

The bonds issued by the U.S. Treasury are the benchmark of choice because the financial-services industry considers them relatively risk-free, given their backing by the U.S. government. Investors consider corporate bonds, on the other hand, riskier, even when they’re issued by the largest, longest-tenured and most highly rated companies in the most stable industries.

To purchase debt securities with that added risk, investors look for compensation in the form of extra yield. That’s why investors sometimes look at a debt security’s credit spread as an indicator of the perceived riskiness of a company’s bonds or the creditworthiness of the company itself.

Because they have a lower risk of defaulting, higher quality bonds can offer lower interest rates – and lower credit spreads – to investors. Conversely, lower quality bonds have a greater risk default, and so they must offer higher rates – and higher credit spreads – to compensate investors for taking on that risk.

Recommended: Pros and Cons of High-Yield Bonds

Why Do Credit Spreads Fluctuate?

The credit spreads of the bonds issued by a given company may change over time for a number of reasons. They may change because of macroeconomic fluctuations such as inflation, or the degree of market enthusiasm for the company issuing the bond.

When the equity markets seem headed for a downturn, both institutional and retail investors often sell stocks and corporate bonds, and then reinvest in U.S. Treasuries. That pushes down the yields offered by U.S. Treasury bonds as investors flee to safety, while the yields paid by corporate bonds rise in order to entice skittish investors. The result is a general widening of credit spreads across the board.

That dynamic is one reason that investors look at average credit spreads as a window into the overall market sentiment, in which wider credit spreads indicate declining investor sentiment. Narrower credit spreads typically signify more bullish sentiment among investors. That’s because during a bull market the safety of Treasuries holds less appeal to investors, forcing the notes to offer higher rates. Meanwhile, that same confidence leads investors to see corporate debt as less risky, allowing companies to issue bonds with lower yields.

What Is a Credit Spread in Option Trading?

Sometimes, investors use the term “credit spread” to refer not just to the difference in yield offered by a Treasury bond and a similar security, but also as a specific options trading strategy. The strategy is also sometimes known as a “credit spread option” or a “credit risk option.”

In an option credit spread strategy, an investor buys and sells options on the same underlying security with the same expiration, but at different strike prices. The premiums the investor receives on the option they sell should be higher than the premiums they pay on the option they buy, which leads to a net return for the investor.

The strategy takes two forms:

Bull Put Spread

In the bull put spread, in which the investor buys and sells options in which they’ll make a maximum return if the value of the underlying security goes up.

A bull put spread is often also called a put credit spread. In it, an investor sells a put option and purchases a second put option with a lower strike price. For the strategy to work, the investor buys the same amount of both options and, both options will have the same expiration date.

In a bull put spread strategy, as long as the price of the underlying security remains above a certain level, the strategy will begin to produce profits as the differences between the value of the two options begins to evaporate as a result of time decay. Time decay is how much the value of an options contract declines as that contract grows closer to its expiration date.

As the name indicates, the bull put spread is a strategy used by investors who are bullish on a security. And the higher the underlying security rises during the options contract, the better the investor will do. But if the underlying security falls below the long-put strike price, then the investor can lose money on the strategy.

Bear Call Spread

The other credit-spread is called the bear call spread, or a call-credit spread. That strategy is, in many ways, the mirror opposite of the bull put spread. Investors in this strategy expect that a security’s price will go down. In it, the investor buys and sells two options on the same security, with the same expiration date but at prices where the investor will receive the maximum return if the price of the underlying security sinks.

A bull put spread can be a profitable strategy if the investor remains under a certain level over the duration of the options contracts. If the security is below the short call’s strike price at expiration, then the spread seller gets to keep the entire premium, giving the investor a healthy return. But the risk is that if the price of the security rises above the long-call strike price at the expiration of the strategy, then the investor faces a loss.

Recommended: A Guide to Options Trading

The Takeaway

A credit spread is an important indicator of investor sentiment. It’s also an options strategy where a high premium option is written and a low premium option is bought on the same security. Understanding the meaning of terms like credit spread is an important step for new investors who are just starting to invest in stocks.

The SoFi options trading platform is a great way to get started, thanks to its user-friendly design. Investors can trade from the mobile app or web platform. And should any questions come up along the way, there’s a library of educational resources about options available.

Trade options with low fees through SoFi.

Photo credit: iStock/Astarot

Oct

2021

What is SushiSwap (SUSHI)? How to Buy SUSHI

Guide to Investing in Sushi Swap (SUSHI)

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

Behind every new cryptocurrency these days, there’s typically an old one. One classic example is when Bitcoin Cash split off from Bitcoin. In the volatile and dynamic world of DeFi (decentralized finance), consider SushiSwap forking from Uniswap, one of the biggest and most valuable decentralized cryptocurrency exchanges.

SushiSwap is one of the fastest growing types of cryptocurrency. Here, we’ll explore what it is, how it works, and whether it’s a good crypto investment.

What is SushiSwap (SUSHI) Cryptocurrency?

SushiSwap, a decentralized cryptocurrency exchange, is run on smart contracts. Individuals can trade cryptocurrency with each other using the Ethereum blockchain. The Sushi coin is a token that allows its holders to make decisions about how SushiSwap is run.

This is different from how more mainstream, centralized cryptocurrency exchanges operate. How those cryptocurrency exchanges work is not that different from a traditional brokerage: you set up an account, load it up with money, and buy an asset — with the exchange taking either a fee or the “spread” between how much the asset is selling for and how much people are willing to pay for it (or sometimes both).

Decentralized exchanges like SushiSwap try to live up to cryptocurrency’s anarchic ethos by building a framework for people to exchange cryptocurrency with each other. One way this happens is by “liquidity mining”, where users contribute cryptocurrency they own to “pools” (pairs of crypto that can be traded on the exchange) in return for fees from the platform or, in this case, Sushi. Conceptually, this is similar to Bitcoin mining, but it typically happens on Ethereum-based blockchains and in some ways is also analogous to how banking works.

Recommended: What is a Decentralized Exchange (DEX)?

SushiSwap incentivizes users to provide liquidity for certain token pairs so that they’re available to traders on the platforms by adjusting how much they get paid out in fees. The pairs are usually Ether and another token.

Governance is another defining feature of Sushi crypto. The Sushi token enables its holders to vote on platform policy and technological choices.

How Does the SUSHI Token Work?

The Sushi token works as an incentive for staking SushiSwap with cryptocurrency pairs that can then be exchanged by its users. By staking your crypto, you get paid out in Sushi as well as fees from the exchange itself. You can also buy and sell Sushi itself.

SUSHI Price

Despite only being around for less than two years, Sushi has taken a wild ride in terms of price. As of September 30, 2021, it was the 76th most valuable token on CoinMarketCap and was trading at nearly $11. It had been priced as low as 49 cents late 2020 and as high as $23 in March of this year. The token has a market cap of $1.4 billion.

Because SushiSwap underlies a whole ecosystem of tokens, there are other relevant statistics besides the price of the Sushi token. One should also look at the whole sushi exchange universe, including SushiSwap. There’s about $4.3 billion of “total value locked” on SushiSwap, representing the value of assets staked on the platform.

History of SushiSwap

SushiSwap grew out of the most prominent DeFi exchange, Uniswap, in 2020. The Uniswap developer, “Chef Nomi,” explicitly designed SushiSwap to reward Uniswap users who migrated to the fork.

But controversy soon followed. Nomi admitted to and apologized for extracting $14 million worth of Ether from the platform before returning it to the crypto wallet used for the platform. This led to a major crash in the price of the Sushi token that it didn’t recover from until earlier this year.

Since then, the governance of SushiSwap has been overhauled and it has more than made back the losses it earned from its early developer errors.

What Can You Use SUSHI For?

The primary use for Sushi is on SushiSwap, as a reward for staking crypto to make its decentralized exchange function. Additionally, owning Sushi allows holders the right to vote on decisions regarding how the exchange functions.

As with any cryptocurrency or token, when people decide to invest in SUSHI it’s because they hope it will go up in value. Of course, given how volatile cryptocurrencies are, it’s impossible to predict the price of SUSHI or any other coin. This is part of the basics of investing in crypto. Before buying, selling, or trading crypto, investors should become familiar with crypto rules and regulations. For example, Sushi can’t be bought in every U.S. State.

Is SUSHI Crypto a Good Investment?

Interest in DeFi platforms and associated tokens is growing. There are two main reasons for this:

1. People want to trade tokens with each other in a way that doesn’t involve direct use of centralized exchanges and fiat currency.

2. They see the associated tokens as good investments.

On the other hand, this increased interest means there is fierce competition between platforms for staking, liquidity, and token investment. SushiSwap is perhaps the best example of the risks of investing in a given DeFi platform — it was itself a clone that explicitly tried to suck away liquidity from an earlier platform and was rocked by an early scandal with one of its lead developers.

In the wild west of DeFi, software products can spring up very quickly. And because the field is so new, there’s little brand or institutional loyalty among customers, users, and other stakeholders.

How and Where to Buy SUSHI Cryptocurrency

There are two ways to acquire Sushi.

The first is through an exchange that lets you buy cryptocurrencies with U.S. dollars or other fiat currencies. You fill an account with dollars and buy the corresponding crypto. Some exchanges that allow you to buy Sushi are Kraken and Coinbase. Some exchanges also let you trade mainstream, establish cryptocurrencies like Bitcoin for coins like Sushi.

Second, there’s the more native way to earn Sushi. You can connect your existing crypto wallet to
SushiSwap to provide liquidity to the exchange and receive Sushi as a reward.

The Takeaway

SushiSwap is a decentralized cryptocurrency exchange run on the Ethereum blockchain. It encourages staking by incentivizing users with Sushi tokens. And in turn, Sushi tokens offer governance to holders, so they can vote on platform policy and technology.

Before investing in any cryptocurrency, it can be helpful to read a cryptocurrency guide. The world of crypto is dynamic and can sometimes be counter-intuitive. Doing your own research is always worthwhile.

Photo credit: iStock/Михаил Руденко

Oct

2021

Can Dogecoin Reach $100? Or Even $1? $10? $1,000?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

After rising from about $0.0002 to more than $0.70 in a matter of months, many people have found themselves asking the question “How high will Dogecoin go?”

Many people investing in cryptocurrency for the first time appear curious about DOGE and other altcoins. Even though the DOGE price crashed more than 70% all the way down to $0.20 before recovering somewhat, Dogecoin still finds itself among the top 10 cryptocurrencies by market cap.

But will this always be the case? Can Dogecoin reach $1? What about $10 or even $100 or more?

There are several reasons the odds are against DOGE climbing too much higher. Valuations like $1 or even $10 are theoretically possible. But a price target of $100 or more, isn’t realistic for DOGE, given the way the coin works.

While it’s impossible to predict the future when it comes to the price of DOGE or any other investment, we can make a reasonable hypothesis as to whether DOGE will ever reach $100.

Recommended: How to Buy Dogecoin (DOGE)

Table of Contents

Will Dogecoin Reach $1?
Can Dogecoin Reach $10?
Can Dogecoin Reach $100
Can Dogecoin Reach $1000

Will Dogecoin Reach $1?

Dogecoin reaching $1 is a distinct possibility. This would be less than 50% higher than the all-time high of about $0.70 per DOGE.

The question “can Dogecoin reach $100,” or $1, or any price for that matter, has to do with two things: DOGE’s market cap and its mining dynamics.

Understanding the size of the DOGE market cap in relation to its new supply makes it clear how high the price of DOGE can or can’t go. Every minute, miners receive a reward of 10,000 DOGE for solving a new block. This amounts to 5 billion new Doge coins being minted each year.

Recommended: Will Dogecoin Ever Be Capped?

By the end of the year 2030, there will likely be about 180 billion DOGE circulating. For the price of DOGE to reach $1 by that time, the market cap of Dogecoin would have to be $180 billion.

The current market cap of DOGE at the time of writing is about $37 billion. There are currently 130.8 billion DOGE in circulation. To reach a valuation of $1 per coin, the market cap of DOGE would have to more than triple, rising by more than $80 billion.

To get to $1, then, there would have to be a lot of money flowing into DOGE. While some believe this might be possible, many others don’t foresee a $1 valuation in DOGE’s future.

Can Dogecoin Reach $10?

For the DOGE price to continue climbing, there has to be much more money flowing into DOGE than new coins being mined. Because DOGE has no supply limit, and the block reward is so large (10,000 coins per block, compared to 6.25 coins per block for BTC), it becomes exponentially harder for Dogecoin to achieve a higher price over time.

The 2021 bull market in Dogecoin saw its price rise from $0.0002 to $0.70 in a matter of months was a unique event. While the exact conditions that lead to any market event can be hard to pin down, there are a few unusual circumstances that combined at the same time, likely giving DOGE a huge boost.

• It was in the middle of a Bitcoin bull market, when BTC and other cryptocurrencies were also hitting new all-time highs.

• The coronavirus pandemic of 2020 had been going on for less than a year, and many people around the world were still staying home. Some of them were investing for the first time.

• Dogecoin saw several notable celebrity endorsements in quick succession with one another.

Owing to the impact of these headlines, some have accused DOGE of functioning like a giant pump-and-dump scheme because of its quick rise and fall.

That said, it’s possible for DOGE to reach $10, at least briefly, at some point in the next decade.

Can Dogecoin Reach $100

It would be nearly impossible for Dogecoin to reach $100, because there isn’t quite enough money in the whole world.

Every $1 that the Dogecoin price were to increase would require an additional $180 billion in 2030. To reach $100 by 2030, then, there would have to be $18 trillion invested in Dogecoin.

Global GDP is estimated to be about $87 trillion. The GDP of China is around $15 trillion, while the GDP of the U.S. is about $21 trillion.

In other words, a $100 DOGE price would require a market capitalization of more than the annual gross-domestic product of the entire nation of China by the year 2030. It doesn’t take a market genius to determine that this simply isn’t going to happen.

Even if that much money wanted to find a home in DOGE, it’s unclear whether or not crypto exchanges would be able to handle that kind of volume.

There’s one more factor to consider. The total holdings of all the DOGE that has been mined, as of 2021, are centralized into the hands of just a few crypto wallets.

One wallet holds more than 25% of all the DOGE in existence, while the top 20 wallets hold over 50% of all DOGE.

How high could Dogecoin go? The answer is: Probably not that high. If for no other reason, the people who control a few wallets with billions of coins in them are likely to take some profits whenever the price of DOGE sees a sharp rise, capping any gains.

Can Dogecoin Reach $1000

If the answer to the question “can Dogecoin reach $100” is no, then there’s no way that Dogecoin could ever reach $1,000.

It would take so much money for this to become reality that there’s really no scenario where it could happen.

Much of this stems from the fact that DOGE is a meme coin with little technical development. Traders typically use it as a vehicle for transferring value or seeking speculative gains, rather than HODLing it.

This represents a stark contrast to Bitcoin, which has become more of a mainstream store of value and investable asset class due to its active development community, high level of network security, and its fixed supply limit of 21 million bitcoins. The supply of newly mined bitcoins also gets cut in half every 4 years, whereas no such “halving” event ever occurs for Dogecoin.

Bitcoin’s market cap eclipsed at the time of this writing is above the $1 trillion mark. Because the supply of BTC is always declining, the market cap and price can continue rising, absent some unforeseen catastrophe.

The same cannot be said for other types of cryptocurrency like Ethereum and Dogecoin that have no supply cap.

The Takeaway

Much of the answer to the question “Can Dogecoin reach $100?” has to do with simple supply-and-demand dynamics. Because of the way DOGE mining works, it’s nearly impossible for one DOGE to reach a valuation of $100. That said, $1 per DOGE could happen, and $10 is a longshot but not completely outside the realm of possibility.

Photo credit: iStock/Alexander Buerkle

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First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

Oct

2021

Bitcoin Fees: How to Save on Bitcoin Transaction Fees

Bitcoin Fees: How They Work and 3 Ways to Save on Them

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

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.

Recommened: 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, to 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 which 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.

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.

Photo credit: iStock/happyphoton

What is a Private Blockchain and How Does It Work?

Basics of Blockchain

What is a Public Blockchain?

What is a Private Blockchain?

How Do Private Blockchains Work?

Pros and Cons of Private Blockchains

Pros of Private Blockchains

Lower Energy Usage

Ability to Remove Unwanted Activity

Faster Transactions

Cons of Private Blockchain

Potential for Censorship

Decreased Security

Public vs Private Blockchains: Main Differences

Is a Public or Private Blockchain Better?

The Takeaway

What Is a Credit Spread? Explained and Defined

Credit Spread – the Market Indicator

Why Do Credit Spreads Fluctuate?

What Is a Credit Spread in Option Trading?

Bull Put Spread

Bear Call Spread

The Takeaway

Guide to Investing in Sushi Swap (SUSHI)

What is SushiSwap (SUSHI) Cryptocurrency?

How Does the SUSHI Token Work?

SUSHI Price

History of SushiSwap

What Can You Use SUSHI For?

Is SUSHI Crypto a Good Investment?

How and Where to Buy SUSHI Cryptocurrency

The Takeaway

Can Dogecoin Reach $100? Or Even $1? $10? $1,000?

Will Dogecoin Reach $1?

Can Dogecoin Reach $10?

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Can Dogecoin Reach $100

Can Dogecoin Reach $1000

The Takeaway

Bitcoin Fees: How They Work and 3 Ways to Save on Them

What are Bitcoin Fees?

How Do Bitcoin Transaction Fees Work?

Why Do Transaction Fees Go Up and Down?

3 Strategies to Save on Bitcoin Transaction Fees

1. Know What You’re Paying — or Will Pay

2. Use a Wallet With a Set Fee

3. Use the Lightning Network

The Takeaway

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