Bitcoin is practically free to use but fees and other costs add up
If you haven’t been onboarded to bitcoin yet, you’ve probably wondered how much it costs to get started. The truth is that costs vary depending on how busy the network is, but it’s the service costs many of us pay for convenience which cost the most.
Bitcoin is pretty complex to use if you don’t have the right tools, so exchanges and other services charge their customers a premium to offset that complexity, often retaining control of their customers’ assets entirely.
With bitcoin now drawing more public interest than ever, the next wave of newcomers can start off the right way and buy bitcoin directly to their own wallet, making the industry as a whole more robust and bringing down the costs of using bitcoin.
One of the reasons why bitcoin is so popular is because it has all the necessary properties for digital money: it can be transferred cheaply anywhere in the world, stored without the need for a third party, and is not centrally controlled, making it resilient against political attack.
These attributes alone make it worth paying a bit extra for bitcoin, but when you compare it to the traditional fiat currency system, bitcoin is still cheaper to use.
Advances such as the lightning network mean it has never been quicker or cheaper to pay with bitcoin, and today’s inflationary climate makes bitcoin attractive to those wanting to store their savings somewhere decoupled from central banks, which has been bitcoin’s primary use case since block one.
Bitcoin for payments
Cryptocurrencies like bitcoin allow users to bypass the tedious and expensive process of sending and receiving money from others, especially across borders. For example, those living outside of their country of origin can send funds back to their families faster using bitcoin, without paying hefty fees or needing to travel to a physical branch. With the lightning network, bitcoin payments are equally as convenient as card payments, without geographic or political restrictions.
As cryptocurrency becomes more publicly visible and accessible, a greater number of merchants are accepting it as a means of payment for their products and services, where card companies currently charge fees that bitcoin eliminate. And while fiat currency is still more widely accepted, you can already spend your bitcoin at major chains around the world from Pizza Hut to hotel stays in Dubai.
Bitcoin as a store of value
Non-traditional assets like bitcoin can act as a hedge against inflation as bitcoin is designed to become more scarce over time. The number of bitcoin rewarded to miners with each completed block halves every 210,000 blocks, roughly every four years. Bitcoin becomes scarcer over time, while dollars, euros, pounds and other fiat currencies are increasing their supply by double-digit percentages each year.
Because it does not rely on a centralized system, bitcoin is not subject to transaction limits, account freezes, multi-day wait times, and other restrictions associated with fiat currency and can be a great way to send and receive funds. All this makes bitcoin a more economical alternative to using fiat currency, but what about the extra costs?
Now that you know all the things that bitcoin can do, you’re probably wondering what the catch is. Securing the bitcoin network costs billions of dollars in hardware, so where does that money come from?
The primary cost associated with using bitcoin is on-chain fees i.e. the fees that bitcoin users pay to miners to confirm their transaction. Other fees tend to come from the service providers that users often opt for. Let’s look at a few common uses of bitcoin and the typical costs you’ll encounter.
Purchases
The very first cost you will accrue when starting out is actually getting your hands on some bitcoin in the first place. There are multiple ways to buy bitcoin: you might buy from a centralized or decentralized exchange, or buy directly from a fellow crypto user (known as buying peer-to-peer), you could also use a bitcoin ATM, or some alternative platform such as PayPal.
On the most basic level, the major cost here would be the bitcoin itself, but newcomers are often surprised to learn that you don’t need to buy a whole bitcoin, you can by just a small fraction for several dollars if you want to.
The main way that your bitcoin-related costs can inflate well beyond the actual cost of the bitcoin is through transaction fees. These are the fees that your platform of choice charges you for buying or selling your cryptocurrency. Different exchanges calculate these fees in different ways, usually taking a percentage from both the buyer and the seller, or by inflating the asset cost itself and taking the difference as their cut. If you are purchasing your Bitcoin from any third-party platform, you should factor these costs into your overall expenses.
While these types of fees are inevitable to a degree, it would be in your best interest to compare the costs associated with several crypto exchanges before you make a commitment. Tools like Invity in Trezor Suite, for example, allow you to compare fees across dozens of crypto exchanges, so you can know in real-time, exactly how much bitcoin you will get for your money, and have them sent directly to the secure self-custody of your Trezor wallet, avoiding the withdrawal fees we cover below.
But why do these exchanges charge these extra fees? Whether they retain custody of the tokens or not, these platforms charge fees as part of their business models and if the customer is not buying the tokens directly into their own self-custody wallet, these fees are virtually inevitable.
Payments
Using bitcoin as intended, you will probably want to pay with it at some point. At some points in bitcoin’s history, payments have been a little problematic due to high network activity leading to extremely high fees.
The so-called Block Size Wars around 2018 were fought over what the correct solution should be, ultimately leading to an upgrade called SegWit. This allowed the Lightning Network to be created, a second-layer network that reduces payment costs to almost nothing and only occasionally settles to the bitcoin blockchain.
With the introduction of the lightning network, on-chain fees have mostly calmed down, with 1 sat/vbyte transactions having confirmed for much of the last few years. Recent experiments with ordinals and stamps have created new challenges in its wake, however.
Paying on the lightning network is ideal for small amounts of bitcoin, while you store your savings more securely on a hardware wallet. There are too many lightning wallets to recommend a specific app, but it is best to go with a non-custodial and open-source lightning wallet like Phoenix, Breez, Zeus or Blixt.
Trading costs
While most experienced bitcoiners will advise you against trading, especially without professional experience, newcomers often turn to trading to chase greater profits. This may mean wanting to exchange a portion of your stash for fiat currency due to a cash crunch or simply swapping between cryptocurrencies in search of trading profits.
Whatever your reason, there may come a time that you will decide to trade your bitcoin for another asset. But just like buying bitcoin in the first place, this can attract a fee. Some exchanges charge a flat percentage while others charge a dollar amount for each transaction and once again, this must be factored into your costs.
These costs are largely arbitrary and are not used to pay for transaction fees, rather they are part of the platforms business model. With a number of exchanges suspected of counter-trading their own users, newcomers should be especially cautious about trading. Since crypto exchanges are less regulated than other markets, high amounts of leverage and easy access to complex financial instruments such as options trading poses a massive risk to inexperienced users and should be avoided, as using these recklessly could cost you your entire savings.
One way to get around trading fees is to exchange cryptocurrencies directly through your self-custody wallet using inbuilt decentralized exchanges. Several wallets, Trezor included, allow users to swap assets through their app. When assets are swapped, the only cost that is incurred is the network fee expended on the transaction. In the case of Trezor, you can also select what fee rate you wish to pay to confirm the transaction.
Because the bitcoin blockchain is incentivized to prioritize transaction requests that come with a higher fee, if you select a lower fee, it will take longer for your transaction to be completed. But if you are looking to incur as little cost as possible when dealing with bitcoin, this is often your best bet.
Withdrawals and transfers
Given that one of the most common uses of bitcoin is transferring funds from one wallet, or an exchange, to another, it is important to understand how much it costs to do so and where the charges can be avoided. And to understand this, you need to look at how the bitcoin blockchain works in the first place.
When a transaction is initiated, it waits to be validated by mining nodes. In return for validating transactions, the miners are rewarded in the form of transaction fees as well as a fixed block reward of 6.5 bitcoin. Because the validators are doing this for material rewards, they are incentivized to validate the transactions that pay higher fees.
When you initiate a transfer from your Trezor, you can choose the fee you pay according to how quickly you need the transaction validated, which can be higher during busy periods. Exchanges also pay transaction fees when you initiate a withdrawal, but they tend to batch many users’ transactions together and don’t show you the actual on-chain fee. Instead, exchanges tend to charge arbitrary withdrawal fees which are many times higher than the network fee itself. This may be a fixed amount or a percentage, so depending on which platform you use, this could significantly increase your expenses.
A way to get around this hidden premium is to simply use bitcoin as it was designed to be used: don’t rely on centralized, custodial exchanges and instead get a self-custody bitcoin wallet like Trezor which lets you buy peer-to-peer, helps you avoid hidden fees as well as enjoy a ton of benefits, like privacy features, automated buying, and having complete control of your funds.
Obviously, if you are going to use cryptocurrency you will need a wallet to store it in. And just like with bitcoin transfers and purchases, this could cost you a little or a lot of money, because there are different types of crypto wallets with different features for users to choose from.
Paper crypto wallets are a simple way to take custody, where the user simply writes down their blockchain address and their private keys on a piece of paper. This type of wallet is completely free to set up as there are a plethora of services online that will help you generate your address and keys. The downside of this is that the paper on which these details are written could get lost or stolen, and the method for generating the keys can be fundamentally insecure.
There are also exchange wallets, which are more like email accounts. While you can set up a password and have access to a portfolio, exchange accounts don’t offer you any real ownership of your crypto. If your exchange goes bankrupt, any assets you leave there may be considered the exchange’s assets, and you may lose everything. For that reason, exchanges should never be used for long-term storage.
Then there are hot wallets which are programs that maintain a connection to the internet and let you create and manage your bitcoin keys yourself, giving you full control over your crypto. These are also typically free to set up and can be used as mobile apps, browser extensions, and so on. And while they are very affordable to set up, they are more susceptible to hacks and attacks because they are connected to the internet.
Finally, there are hardware wallets, which were first pioneered by Trezor in 2013 with the Trezor Model One. This cold storage approach is widely regarded as the safest and most cost-effective ways to secure bitcoin. Hardware wallets never connect your secure key data to the internet and keep your money safe from online attacks. This, however, is a bigger up-front cost as you will have to buy the hardware wallet for $60 or more. Despite this one-time cost, using a Trezor can help you avoid other costs such as withdrawal fees, inflated network fees, and lets you offset the risk of losing your assets entirely, which remains a constant threat for exchange and hot wallet users.
As a cryptocurrency user, it is important that you have as much information as possible, especially when it comes to spending your money. As the overview above shows, using bitcoin can cost a little or a lot of money depending on how much convenience you want and what sorts of services and platforms you make use of.
Engaging with third-party crypto businesses such as centralized exchanges tends to hike up the costs associated with bitcoin, as well as the risks! And while some may find these sorts of businesses to be essential and worth the extra costs they incur, others might not.
Ultimately, it is up to you to decide which options, whether wallet type or the amount of Bitcoin, that is best for your unique situation. What’s important to remember is that starting the right way, and buying bitcoin direct to secure self-custody, can mean big savings as you avoid hidden exchange fees. And it will also protect your privacy for the long-term.
