There’s always a cost to doing business. And that includes mining cryptocurrencies like Bitcoin — a cost that is often expressed as a trading fee, a transaction fee, or a “mining fee.”
As many Bitcoin enthusiasts know, one way to add to your holdings is to mine. Bitcoin mining is a validation process that takes place on a blockchain and rewards the miner with additional tokens or coins.
There are often fees associated with mining. What is a mining fee, and who pays it? We’ll get into it all below.
Bitcoin Mining Basics
Since Bitcoin is decentralized — meaning it’s not regulated or issued by a central authority like a bank or government — Bitcoin miners are the ones who make sure everything is above board.
Bitcoin mining is the process that validates and secures Bitcoin transactions and also creates new Bitcoin tokens (out of a total 21 billion bitcoins in existence). It’s an intricate, resource-intensive process that utilizes high-powered computers to solve complex math problems.
Once Bitcoin transactions are executed, they need to be verified. That means that they’ve been added to the public record and stored on the blockchain, and verified to be accurate (not a duplicate transaction, for instance).
Miners solve math problems (this is called proof of work) using Bitcoin mining software. The miner who does so unearths the next block on the blockchain which will store the transaction data and information. As a reward for doing so, miners receive Bitcoin or fees as a reward.
Bitcoin mining can also be done through cloud mining, using cloud-based software to mine. Bitcoin mining pools exist, too, in which miners “pool” their resources to mine.
What Are Mining Fees?
When miners are rewarded for participating in the validation and expansion of the blockchain network, they’re rewarded — either with Bitcoin or with a portion of the harvested fees.
Mining fees are like transaction fees you might get charged by merchants or banks. Resources are required to run a credit card and handle the back-end of a transaction, and it isn’t free. Often, merchants assume the costs.
For instance, if you swipe your credit card at a big chain store, you’re not likely to be charged a credit card transaction fee by the store — the company eats the cost. But, if you go to a small, mom-and-pop restaurant, they may add a credit card processing fee to your transaction (around 2%, usually).
Another similar type of fee would be a foreign transaction fee, a fee that’s incurred for transacting between two different currencies.
Miners fees are similar to those processing fees. In short: Miner fees are an incentive to miners to process transactions on the blockchain and to verify and secure the network.
Recommended: Is Crypto Mining Still Profitable in 2021?
Who Pays Bitcoin Mining Fees?
The answer to who pays mining fees depends, based on certain factors.
Remember the earlier example about credit card transaction fees at big-box stores vs. small mom-and-pop restaurants? The same dynamic is at play when it comes to mining fees. Depending on the exchange you’re using to transact your cryptocurrencies, you may or may not be responsible for paying them.
Coinbase, for example, “incurs and pays these fees directly,” according to company documents . But Coinbase also charges a fee to end users for conducting the transaction — it’s similar to paying a commission to a stockbroker for executing a trade. In effect, a transaction fee like this is more or less the same as paying a Coinbase mining fee, albeit in a slightly different form.
Kraken, another popular crypto-trading platform, likewise charges small “trade fees” to execute transactions. Binance, another popular platform, also charges trading fees but offers discounts to certain users, and those that use its in-house token, BNB.
What Determines Mining Fees?
The specific amount of a Bitcoin miner fee depends on the specific blockchain network in question. Different blockchain networks will have different calculation methods.
But in general, a mining fee will depend on the state of the network at any given time, and also the size of the transaction. It’s a lot like a ridesharing app calculating prices on the go: the state of the market (i.e., supply and demand) ultimately determines the end price.
When it comes to the Bitcoin blockchain network, mining fees depend on the available supply, and the corresponding demand for space on the blockchain. When there are a lot of transactions to process, the network becomes congested as there’s a lot of competition for space. As a result, fees increase. And vice versa.
For example, during Spring 2021, the crypto market was soaring, and trades were happening left and right. As a result, fees spiked — at one point, transaction fees averaged more than $62.
But as things settled down during the following months, prices decreased. Throughout the late summer and early fall months of 2021, fees averaged between $3 and $4.
If you find yourself asking “why are mining fees so high,” the answer is likely because many other traders are trying to execute transactions at the same time you are.
Bitcoin Mining Fee Example
Here’s how a crypto investor might run into a transaction, trading, or mining fee:
Let’s say you’re using an exchange and want to send a friend, F, one bitcoin. Technically speaking, you’re transferring X amount of Bitcoin from your address, or crypto wallet, to F’s. Using your keys, you sign off on the transaction by specifying your bitcoin’s address, F’s address (or public key), and how much you want to send.
A message is then sent to the network containing that information, and it reaches a mining node, where miners get to work validating and verifying it, and “mining” a new block on the blockchain. Before that change to the network takes place, you will be notified of the applicable mining fee for executing the transaction (which will depend in part on how busy the network is, and the size of the transaction).
That fee is attached to your transaction order, in most cases, and is paid in Bitcoin. The fee is paid to the miners doing the “mining” on the blockchain.
In effect, you’ll have sent F one bitcoin, plus X% of a bitcoin (whatever the fee amounts to at the given time) as a mining, trade, or transaction fee.
The Takeaway
Crypto may be a decentralized asset, but that doesn’t mean it’s a free-for-all. And that’s particularly true when it comes to paying fees necessarily to facilitate transactions, like mining fees.
Miners get paid to validate transactions, and their fee comes from somewhere — often, from the person initiating the transaction.
Photo credit: iStock/Inside Creative House
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