TechRepublic’s Dan Patterson and Brandon Vigliarolo discussed an aspect of cryptocurrency that is often forgotten about: the fees. Buying and selling cryptocurrency involves variable fees to incentivize miners, and they can become quite expensive. Below is a transcription of the video discussion.
Patterson: Brandon has written about cryptocurrency extensively, and there’s one theme he’s noticed with all forms of currency and that is fees that exist everywhere. Brandon, what are these fees? Who is applying these fees? How much are these fees? What’s important here?
Vigliarolo: The importance is probably the potential sky high costs. The fees are not consistent. Basically, the way bitcoin fees work is if you want to add a transaction to the blockchain, a miner is the one who adds transactions to the blockchains.
If you send me .5 bitcoins, you’re going to have to apply that to the blockchain. In order to make someone want to mine it, you’re going to have to pay a certain amount of bitcoin for an incentive. If the incentive is too low, it’s going to fall off the chain and never get mined. If it’s too high, you’ve wasted your money.
There’s no consistency to fees. There’s averages, there’s guesses based on the strength of the network and the number of blocks being processed, but they’re so variable. You might end up spending $15 on a $15 transaction just to make sure it gets to the blockchain.
Patterson: Where are these fees being applied?
Vigliarolo: During the transaction, depending on how you’re sending bitcoin. Some websites will say, “Hey, you’re going to have to give a certain amount of bitcoin for a fee.” Then you’ll say, “Alright. This is the max I’m willing to pay for my fee.” During the process of mining, that will come out and you’ll get a response back saying, “Your bitcoin transfer was successful and this was the fee that was applied.”
Patterson: The fee is relative and sometimes can be user selected. Other sites have static fees, correct?
Vigliarolo: That’s correct. Usually those fees are static but they’re variable as well. A lot of times they’ll be static based on the strength of the network or the number of transactions happening. They might vary a little based on the day and the strength of the currency, but you’re not going to be able to adjust those yourself. Some websites you will. Others are just going to factor that in to the sale.
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You might send $15 for the bitcoin and then the recipient gets $14.65 and that other amount is just lost to the miner or disappears into the ether.
Patterson: Speaking of ether, Ethereum has been on the rise lately and one of the drivers of Ethereum is a fun little game that you wrote about called CryptoKitties. CryptoKitties are digital cats that are fun and cute and also pretty costly.
The transaction fees of CryptoKitties are then slurped up by the owner of the company. Brandon, explain how product fees are attached to cryptocurrency.
Vigliarolo: I bought two cats and tried to breed them; everything you do is transaction fee related. You’re going to sell a cat, transaction fee. Buy a cat, transaction fee. Breed your own cats–two that you own–transaction fee. That makes sense because these are all changes to the blockchain, but they can be almost the same as the price of buying the cat in the first place.
Those costs are going to go to the miners or, in some cases, the owner of these things and it’s the way for that person to make the money and really be the big beneficiary in all this. Now I have three CryptoKitties that, if I want to sell, I’m going to have to invest almost the amount of money that I’ll make based on the sale just in trying to make sure that gets to the blockchain.
- What is blockchain? Understanding the technology and the revolution (free PDF) (TechRepublic)
- The risky business of bitcoin: High-profile cryptocurrency catastrophes of 2017 (ZDNet)
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- Steam dumps Bitcoin on back of high transaction fees and volatility (ZDNet)
- Quick glossary: Blockchain (Tech Pro Research)