In this article we discuss ways to tackle a problem that will likely become more and more significant as the price of bitcoin climbs higher and higher.

bitcoin transaction fees

Median BTC transaction fees since February 2020. Source: bitinfocharts.com

5 Ways to Save Money on Bitcoin Transaction Fees

 

By all indications, the next crypto bull run is here, with the price of BTC up 12.5% in the last 7 days alone. Bitcoin has certainly come a long way since mid March, when prices tumbled all the way down into the low $4k area. From the beginning of May all the way through the middle of July, BTC was stuck in between a very tight high-$8k and low-$9k range, before violently bursting out above $10k on July 27th.

Along with the price, however, have been skyrocketing transaction fees, which, let’s face it: make transacting in bitcoin not nearly as attractive as it was even just one week ago. Median transaction fees (median fee is considered to be a generally better reference than average fee) have been on a steady incline since July 12th, rising from $0.41 to $3.06, where they are today. That’s nearly a 7.5x increase in just 3 weeks time.

During the height of the late 2017 bull run, when BTC came just inches away from cracking the $20,000 price barrier, median transaction fees shot all the way up to an incredible $34. At that point, it was abundantly clear that bitcoin was no longer viable as a currency, and thus the “digital gold” narrative began to take hold. Thankfully, transaction fees came right back down to 20 cents by March 2018. This was mainly due to fewer traders paying premium fees to move their coins on and off exchanges in a hurry, but also due to an increasing adoption of Segwit addresses which are substantially cheaper to send coins from.

txfee info

BTC % Segwit transactions since one month after the introduction of Segwit via soft fork. Source: transactionfee.info

 

Inevitably, as the price of bitcoin creeps back up along with general interest in the subject, so do the transaction fees. This time around, however, there are a few alternatives in place that weren’t around in 2017 that bitcoin enthusiasts can take advantage of. If you want to avoid having to pay $5 or more to get your transaction into the next block, or if you don’t want to potentially wait days for a cheap transaction to be confirmed, we suggest you give some of these methods a try.

#1. Use Segwit. This is a basic must for any serious bitcoiner these days. Segwit more or less “cheats” the network into thinking transactions are smaller than they actually are, thus increasing the sat/byte ratio of the fee you are using. For example, a regular address (legacy address, starts with “1”) transaction with an 80 sat/byte fee might be calculated as 100 sat/byte when paying the same fee amount with a Segwit address, thus meaning it will likely confirm substantially faster using a Segwit address.

Unfortunately, not a whole lot of big exchanges or web wallets offer the option of using Segwit addresses (those are the long, funky looking addresses that start with “bc1”. However, if you want to be able to save 20-40% on transaction fees, download a wallet that supports Segwit, such as Electrum or Exodus. For those who prefer hardware wallets, both Trezor and Ledger Nano S wallets support Segwit addresses as well.

#2. Use side chains. “Side chains” refer to the Lightning Network and more recently, Liquid as developed by Blockstream. Both involve locking BTC into smart contracts so that it can be transferred off-chain, thus bypassing the confirmation process. As a result, side chain transactions are very fast and very cheap, and will likely be the main solution to bitcoin’s scalability problem in years to come.

While neither are actually in very high demand at the moment and require a degree of technical sophistication in order to operate a node, both have trustworthy 3rd party custodial solutions that allow users to download a wallet and send off-chain bitcoin from one user to another. Some exchanges like Bitfinex will instantly convert Lightning or Liquid BTC into regular BTC free of change, at which point it can be circulated back into the regular bitcoin economy.

#3. Use inter-exchange transfers. This idea doesn’t occur to people as much as it potentially should, but it’s a great way to avoid paying transaction fees altogether. If you are already storing BTC on a major exchange like Coinbase, Binance, or a variety of others and need to send it to somebody else, ask if they have an account on the same exchange. This way you can send them BTC instantly and free of charge, as all exchanges that offer an internal transfer option will perform this type of transaction for free. It can even be done with certain casinos, sportsbooks and custodial wallets, as well.

#4. Batch your transactions. If you need to make a payment to multiple parties, make them all at the same time by batching your payments all into a single transaction. This will help to save a tremendous amount in fees as opposed to sending each transaction out individually. Again, not every wallet will let you make this kind of transaction, but they can be performed using Electrum or Samourai Wallet.

Most wallets that support transaction batching also support Replace By Fee (RBF) transactions, which is handy because this option allows you to adjust your transaction fee upward if the current transaction is taking too long to confirm.

#5. Wait until the mempool has cleared. This is another fee reduction tactic that people frequently forget to employ. The “mempool” is the place where unconfirmed transactions sit while they are waiting to be confirmed. Obviously, if there are a lot of transactions in the mempool, those with the highest fees are going get accepted by miners and confirmed first. Transactions with fees that are very low may sit around for days if there is a significant backlog in the mempool.

If your transaction doesn’t need to go out immediately and the mempool is currently clogged with a heavy backlog of transactions, you can wait for it to go down in size, which usually occurs during off-peak transacting hours (such as midnight EST). A great website for checking the mempool size is mempool.observer. Here you can see not only how big the mempool currently is, but find out what the best, lowest fee is for getting a transaction into the next block, as well as check on your transaction’s “place in line” in the mempool and get notified when new blocks are added to the blockchain.