The craze associated with cryptos has been nothing short of astonishing, considering that it was once a small niche market. However, a sizable chunk of crypto fees is incurred whether conducting on-chain or off-chain transactions. But why are crypto wallet fees sky-high?
Crypto wallet fees are so high because of miner fees paid to the mining network. The more network congestion there is on the chain, the higher the miner fees. Cryptos are adopted for several use cases, so the blockchain networks are increasingly busier, hence the incredible fees.
That said, cryptocurrency wallet fees aren’t dependent on only one factor. Below are more reasons why these fees are so high.
Blockchain Network Congestion Leads to High Crypto Fees
Every crypto bull run attracts a lot of investors, each trying to get a piece of the cake. However, as more people transact, the blockchain gets congested, and miners prioritize transactions with the highest fees.
A recent example occurred when prices hit a high in April 2021. According to BitInfoCharts, the Bitcoin transaction fee at that time was a staggering $62.
Such fees can be attributed to network congestion.
The size of a block of Bitcoin is about 1 MB, and given that each block is mined at 10-minute intervals, miners can only process 1 MB worth of transactions within 10 minutes. Congestion happens when the number of transactions exceeds 1 MB. During an increase in network volume, miners prioritize transactions with high fees.
A similar thing happens on the Ethereum blockchain, where a section of the gas goes to priority fees. You pay priority fees to get preferential execution of your transactions, and the more transactions you make, the more priority fees you need to pay.
Unlike Ethereum and Bitcoin, blockchains that can accommodate a lot of transactions at a go have the lowest fees.
An example is Ripple, which charges only 0.0001 XRP for a standard transaction.
Fast Transaction Speeds Attract Higher Cryptocurrency Fees
Most crypto wallets give users an option of picking the fee rate. This rate, dubbed as sat/byte in Bitcoin, represents the satoshis per unit data a transaction consumes in the chain. The fee is determined by multiplying this rate by the size of a transaction.
A satoshi equals about 0.00000001 BTC.
Bitcoin fees aren’t dependent on the amount you send, but the amount of data your transaction consumes on the blockchain. If you set the minimum fee of 1-2 sat/byte, your transaction will take weeks to complete. Patient users may opt for this option since they don’t intend to pay high fees.
Conversely, if you increase the amount of sat per byte, your transaction is unlikely to face any delays.
Ethereum users must attach tips, or priority fees, to their gas fees, which is an incentive for miners to confirm your transaction before other transactions. Of course, the higher the tip, the more priority your transaction will get on the Ethereum blockchain.
Exchanges Charge Higher Fees for Low Value, Infrequent Transactions
Centralized crypto exchanges make money in many ways, including imposing fees on transactions. Most exchanges utilize a tiered-level fee structure (maker-taker) based on a 30-day trading volume. Makers and takers pay a fee, but those of makers are slightly less.
Makers represent users selling cryptos, while takers are usually crypto buyers.
The fee structure in crypto exchanges favors frequent, large-volume transactions. This model attracts liquidity supplies who create a healthy and functioning market in the exchange. Minor and infrequent trades often attract high fees and end up being cost-ineffective.
Below is an example of Coinbase’s tiered fee schedule:
|Tier||Taker Fee||Maker Fee|
From the table, it’s evident that Coinbase maker and taker fees immensely favor large transactions. The maker fees decrease to almost zero once your trailing trading volume over 30 days exceeds $50M.
Whales’ Transactions Can Spike Crypto Fees
The activity of crypto whales significantly affects cryptocurrency markets, including fees.
Whales are entities or individuals who hold vast proportions of cryptocurrency. If you have more than 1000 BTC, you’re a Bitcoin whale, whereas a holder of 10,000 ETH is an Ethereum whale.
Whales are powerful enough to manipulate the value of cryptocurrencies and can transact hundreds of millions of dollars, affecting crypto prices and market caps.
The activity of whales creates speculation among small traders. Sudden market distortions may result in buy or sale actions.
Once the fear of missing out (FOMO) kicks in, many traders rush to capture profits or prevent losses. Such actions, in turn, create blockchain traffic and congestion. The number of transactions in the mempool suddenly increases, causing miners to prioritize transactions with higher fees.
Whenever whales transact, they create a chain reaction which increases blockchain congestion. Increased chain congestion ultimately leads to high crypto fees.
Crypto Withdrawals Attract Fees
When users create accounts with exchanges, they delegate the task of maintaining their wallets to the exchange. Holding coins in such wallets is free, but moving cryptocurrencies to an external wallet comes at a cost.
Leaving coins in custodial wallets is risky, particularly in this age when hackers target crypto exchanges. That’s why many users opt to transfer cryptos to non-custodial wallets. However, you pay a small price whenever you transfer coins from a custodial to a non-custodial wallet.
Exchanges often charge a flat fee to cover the cost of moving cryptos from an account. The fees fluctuate from one exchange to the next and may be influenced by blockchain network congestion.
Any traffic in the blockchain network will increase the withdrawal fees.
Below is a comparison of the withdrawal fees for Kraken and
|Exchange||Cryptocurrency||Withdrawal Fee||Withdrawal Minimum|
|Binance||Bitcoin||0.0005 BTC||0.001 BTC|
|Kraken||Bitcoin||0.00002 BTC||0.0005 BTC|
|Binance||Ethereum||0.003 ETH||0.1 ETH|
|Kraken||Ethereum||0.0035 ETH||0.005 ETH|
|Binance||Cardano||1 ADA||10 ADA|
|Kraken||Cardano||1 ADA||5 ADA|
|Binance||Ripple||0.25 XRP||30 XRP|
|Kraken||Ripple||0.02 XRP||25 XRP|
|Binance||Polygon||0.1 MATIC||0.2 MATIC|
|Kraken||Polygon||15 MATIC||30 MATIC|
Fiat withdrawals from crypto exchanges are geo-specific, and their charges vary depending on the payment processor. Users withdrawing to their bank accounts might incur UPI or NEFT charges.
Initially, crypto exchanges used to charge deposit fees, but not anymore. However, you’ll incur charges when funding your crypto account from debit cards and PayPal.
Crypto Margin Trading Attracts Liquidation Fees
Similar to other assets, cryptos can be traded on margin. Under margin trading, exchanges/crypto brokers allow users to borrow extra funds to increase their positions, otherwise known as leverage.
Most cryptocurrency exchanges will demand initial collateral.
The amount borrowed on margin attracts an interest fee which goes to the exchange. The amount of margin interest varies depending on the exchange. If your position is liquidated, you lose your collateral and might incur some liquidation fee.
Crypto.com charges a flat 0.16% taker rate on any liquidated position, while Coinbase charges a 2% flat fee on total transactions on any BTC loan you borrow.
Spread Fees Affect Trades on Exchanges
Crypto exchanges are full of hidden fees, and one of them is the spread fee. You don’t trade on the actual market price whenever you purchase or sell crypto on an exchange. Buyers pay slightly more for the coins, while sellers receive less for their sales.
The difference between what you pay and the average price is the spread.
Crypto spread fees range from 0.2%-1.5% but can be more or less depending on the order books. Coinbase charges a spread fee of about 0.5%, but market fluctuations can push this amount to 2%.
Crypto wallet fees can range from very low to very high, depending on how much and how often you trade. If you have enough capital to trade daily and often, then your fees are low. Even if you don’t have a lot of money to trade in the cryptocurrency world, but you have a lot of time, you can leverage out a transaction over a few weeks.
Paying the wallet fees is required, but you don’t have to pay a lot if you follow the ideas in the article.
- Quora: Is there any bitcoin wallet without transaction fees?
- The Ascent: 3 Crypto Exchange Fees to Watch Out For
- Money: Trading Crypto Usually Means High Fees, but There Are Ways to Avoid Them
- CoinTracker: 2022 Crypto-Exchange Fee Comparison
- Crypto.com: Margin Trading Fees and Rates
- Wirex: What is the blockchain fee?
- BitInfoCharts: Bitcoin Avg. Transaction Fee historical chart
- Bitpanda: What are transaction fees and why do I need to pay them?