Now that we have established Bitcoin has a monetary aspect – and the fact that it can be used as a way to send money to anyone else in the world – it’s time to take a look at the transaction fees associated with Bitcoin. Why are these fees so low compared to traditional payment method, and what are they used for?
Transactions Don’t Have to Invoke High Fees
Whenever you use your credit or debit card to pay for something, regardless of whether it is online or offline, you as a consumer will not notice the fees associated with that transaction. But when you own a business that accepts this payment method, the story is quite different. Did you know that every credit card transaction is subject to a 3%-5% fee for the merchant?
The reason for this is because a credit card transaction has to go through so many institutions and systems in just mere seconds in order to validate or reject the transaction. Infrastructure like this has cost banks, credit card companies and governments tons of money, and they need to earn their investment back one way or another.
Let’s say you run an online store and someone sends you a US$50 payment through either credit or debit card. Of that original US$50, the customer will pay that amount in full, but you as a merchant will only receive US$47.5-US$48.5. While that might not seem like a big difference to you right now, imagine handling hundreds of transactions per month, each of which cost you 3-5% of profits because of the current infrastructure.
What might be even the worst part of the current infrastructure is the fact that, as a merchant, you will have to wait 30 days until you receive the money in your bank account. Have you ever wondered why that is? Granted, it also has to do with security, but most of it relates to banks holding on to the money in order to squeeze out every small percentage of interest they can in order to fill their own pockets.
Enter Bitcoin, a brand new type of payment [both for online and offline purposes] which uses its very own infrastructure called the blockchain. Not a single bank, institution or government is involved in processing Bitcoin payments, and transaction fees are a whole lot lower compared to the traditional payment methods. Plus, Bitcoin payments are executed almost as fast as credit card transactions, but there is a twist.
When someone pays with their credit or debit card, the infrastructure will process the details and give an automated “valid” or “invalid” reply. But, even if the transaction is valid, you can’t spend the money for thirty days. Bitcoin transfers, on the other hand, can be spent within mere minutes from the transaction being broadcasted to the network.
So why is accepting Bitcoin so important? Not just because of the lower transaction fees [which are sometimes not even applicable, as not all money transfers require a transaction fee to be included], but also because you can spend your money the same day, which makes it far more business-viable compared to traditional payment methods.
Why Pay Transaction Fees At All?
Keeping in mind that the Bitcoin network does not require an expensive infrastructure to send money worldwide within minutes, it may seem odd as to why there are transaction fees in the first place. The obvious answer would be “because no money transfer service can operate free of charge”, but that isn’t the exact reason in the case of Bitcoin.
Bitcoins themselves are not printed by a government or bank, but they are generated by complicated computational calculations – a process often referred to as “mining”. [More on this in a future article]. Once a block of data [which contains transactions recently broadcasted to the Bitcoin network which are awaiting confirmation or rejection] has been solved, it is thanks to the computer power provided by the people – called “miners” – solving these calculations.
By including a small transaction fee whenever you send Bitcoin to anyone else, it speeds up the inclusion of that transfer on the blockchain. Transactions without a transaction fee will be included on the blockchain as well but can take more time to confirm, as they receive a lower “network priority rating” in order to be processed.
Note from the Author: a traditional Bitcoin transaction fee will be worth 0.0005 BTC.