When you buy bitcoin or any other cryptocurrency, you would likely find some extra fees attached to the actual cost of the coins. This is not abnormal as there are certain fees associated with different cryptocurrency transactions.
Understanding the purpose of these fees, the paying and receiving parties as well as the range of fees expected would help when making future crypto transactions. While some of these fees serve as incentives, some others are basically third-party service charges like the fees paid for trading stocks and other securities.
Fees associated with Cryptocurrency transactions
There are three major fees that go with cryptocurrency transactions which should not be confused. The fees are the transaction fee, the miner fee, and the trading fee. We would concern ourselves mainly with the later (trading fee) but we will first look at the other fees.
The Transaction Fees (Network fees)
This fee is paid for conducting a transaction on a blockchain network hence it is also called, network fee. Network fees are paid to the miners of a cryptocurrency for their work done verifying transactions.
All transactions that take place on the blockchain are verified by a consensus on the network; it is miners who do this work and eventually add the transactions to a block which is in turn added to the blockchain. The transaction fee is usually charged when cryptocurrency is purchased, sold, or transferred, even if it is from an exchange to a personal wallet—any transaction that would be verified by miners.
Blockchains adopt their own system of transactions fees; so what one pays for a transferring a certain cryptocurrency may differ from another cryptocurrency. In some cases, transaction fees are set by the miners themselves. The cryptocurrency sender or receiver will have to accept or reject the transaction cost. For miners to get transactions added their block they are made to set reasonable transaction costs that will be accepted by sending parties.
Most other systems, however, allow senders to set the transaction fee they would pay for the transaction. The miners would have to choose which transaction to add to their block. If a sender includes a low transaction fee, chances are that most miners would avoid the transaction and it would take a longer time to be confirmed. On the flip side, transactions with higher fees are quickly added to a block and verified.
To maintain a balance, some wallet providers use a preset transaction fee which is usually accepted within a reasonable me frame. Cryptocurrency transactions from that wallet, therefore, must pay that stipulated transaction fee.
Another type of fees cryptocurrency traders may have to face is the wallet fee. This fee is paid to wallet providers who manufacture and maintain digital wallets. The fees are used for security software development to provide latest updates.
Wallet fees are usually charged on the first deposit made on the wallet and may include a network fee for confirming a cryptocurrency address for first-time users. Exchanges which operate wallets may also charge a wallet fee separately.
The Trading Fee (Exchange Fees)
Third party cryptocurrency exchanges like Coinbase, Kraken, Gemini etc., are probably the easiest way to purchase and transact cryptocurrency.
This is how crypto exchanges work. They connect cryptocurrency buyers with willing sellers. These trading platforms allow a person to buy cryptocurrency with fiat currency or exchange one cryptocurrency for another.
For their services, cryptocurrency exchanges normally charge a fee—usually a percentage of the value of cryptocurrency being traded. That said, exchanges vary in their approach to service fees. While some have a fixed fee policy, some others operate a flexible pricing model and yet some others even offer a free trading service.
A fixed price policy is prevalent in many exchanges. Bittrex exchange, for instance, charges a 0.25% fixed fee for trading transactions. Similarly, Binance maintains a fixed trade fee of 0.1% and a possible 50% fee reduction when you use their native BNB tokens.
Some other trading platforms offer flexibility with their trading fees. Popular exchanges like Bitfinex, Poloniex and Kraken use a ‘maker-taker’ pricing model. In this case, both the maker (the selling party) and the take (the receiving party) are charged for the transaction. Exchanges can also vary the trade fees depending on the volume of trade to encourage more trades.
Finally, some exchanges offer free trading services. Cobinhood exchange is notable for offering this service. Many exchanges also offer free deposit transactions, withdrawal transactions or both. Note, however, that free trading services do not necessarily mean users wouldn’t have to pay network fees or wallet fees.