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How to Minimize Bitcoin Transaction Fees

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It is known that Bitcoin transactions compete to be included in the block with appropriate amount of fees. Some senders may scare that their transactions are ignored by miners and might be considering to add higher fees for bitcoin payment. There are some ways to reduce bitcoin transaction fees to get payments to reach to the recipients or be recorded in the bitcoin ledger as soon as possible as following:

Reducing the Transaction Size

The appropriate amount of Bitcoin transaction fees is proportional with transaction size (calculated as satoshi per byte), which has nothing to do with the sending amount. In order to reduce the payment fees, bitcoiners could try to reduce the size of the transactions.

How to calulate the size of the bitcoin transactions

We know that each input will add 180 (plus or minus 1) bytes to the transaction. Each output will add 34 bytes to the transaction. Then to reduce the bitcoin transaction size, we could try to reduce the number of inputs as much as we can.

For the number of outputs, the best way is to pay to multiple recipients in one go, which is to increase the number of outputs or have several payments in one transaction if we need. So we barely have ways to reduce the number of the outputs.

For example, Alice needs to pay Bob 0.6BTC. Now she has one bitcoin address A with two outputs which have 0.2BT and 0.8BTC balance respectively and another one address B with one output 0.7BTC balance in his bitcoin client. The cheapest way to send this payment is just to send from address B with one input.

Using Exchange Wallet

We could save a small amount of bitcoin in the exchanges, like Poloniex, Bitfinex, Kraken etc as bitcoin wallet for daily spending. They either charge fixed amount of transaction fees or free for bitcoin withdrawal in which we could set as recipient address. Poloniex charged fixed amount of 0.0001BTC for bitcoin withdrawal. It is free in Bitfinex for bitcoin withdrawal.

We should keep in mind that this method cannot guarantee your bitcoin withdrawal will be sped up in ten or twenty minutes. It might take hours even days due to some unexpected reasons like the empty hot wallet, service maintenance or under DDOS attack etc. Furthermore, it is still a good way to save a lot of transaction fees if the payment is not urgent. What the services normally do is combine several addresses’ balance and send to several withdrawal addresses with well estimated fees in some technique, which assure that the payment will get to recipient soon. In worst scenario, the withdrawal could be stuck many hours, you could submit a support ticket to the platforms.

For security reasons we should activate as more provided security measures as possible to prevent your accounts to get compromised, like SMS 2FA, Google Auth 2FA, or IP address whitelisting etc.

Replace By Fee

Senders could manually adjust the transaction fees to lower end for non urgent payment but need to make sure to activate the Replace By Fee function to this transaction in bitcoin wallet. In case your payment are stuck, we still have a way to increase the transaction fees to bump up them.

The bitcoin clients doing the fees estimation are based on historical data and some algorithm to predict the appropriate fees level for the potential needed time that the payments reach to recipients. The predicted fees are not really accurate and just averaged figure from the low and high end. In addition, some mining pools are imposing their own rules for accepting and excluding some payments, even some payments are paying higher mining fees than other accepted ones. So the time took to complete the payments is variable and we could say it depends on luck. Here is an example.

Like this block #458338 is mined by ViaBTC Bitcoin Mining Pool. The lowest mining fees rate of the payments 7a5f91…11 included in this block is 50.389 sat/B (Fee per byte) and waiting for only 3 minutes to complete the payment. I could say he is lucky. I am not suggesting to add as low as this level fees comparing with as bitcoinfees.21.co/ suggested, the fastest and cheapest transaction fee is currently 220 satoshis/byte before the time this block was mined. In any block there should be a few lucky bitcoin payments with very low fees. Howerever, for the most payments, the fees are around 200sat/B as suggested, which almost take less than 10 minutes to complete.

I was using Electrum to initiate an payment with 135 sat/B fees which is the lowest fees level Electrum suggested just before the previous block was mined and indicats that it will be accepted in 25 blocks (4 hours). Howerever, 5 minutes later the payment reached to the destination address.

But at the time of sending this payment, the fastest suggested fees by Electrum client is 330satoshis/byte, which means that paying this amount of fees will get the payment reaching to the recipient in 10 minutes. This fees level is far more than that figure given by bitcoin.21.co. The difference is caused by used different estimation algorith, sometimes some may overestimate the fees. As a normal bitcoin users, we could check other source to predict the fees level according our needs.

Off-Chain Transactions

This transactions are took outside of the blockchain, which means there is no record available for public review on the blockchain. It works like ChangeTip (closed), banks or PayPal. User have some amount of BTC in their account of such platforms. They could send payments to the other users from the same platform, which is holding transaction history records of every users’ account in their internal database and modify the records for any balance transfer or updates. The senders and recipients must have the accounts on the same platform.

This way of payment is fast and efficient. But the security is down to the platforms and the users.

We could use BTC-e code to send USD, EUR, RUR, or Crypto currencies payment. It is easy to create BTC-e code and pass it to the recipents, who can go to BTC-e and redeem the carrying amount of money. Then the money will be added to the recipients’ account in BTC-e. For the senders and recipient, it is completely free. Or the recipent can go for third party exchange services to exchange BTC-e codes into fiat money or cryptocurrencies.

Bitcoin users can opt to the widely available bitcoin debit card, which can be visa or master card  and are accepted nearly anywhere. Users can fund the cards with bitcoin. After the corresponding amount of fiat money USD or EUR is showing up at the card balance, users can enjoy the instant payment as any other normal debt cards offered by your local banks. Many service providers issues bitcoin debt cards, like SpectroCoin, BitPay,Xapo,Coinbase/Shift,Bitwala etc

Other Altcoins Options

Payers could exchange their bitcoin to other altcoins like Litecoin or Ethereum etc, which has fast block time and less transaction fess in terms of bitcoin. In this case the payers should have suffieient amount of bitcoin available at the exchange and have an agreement with the recipients willing to accept this altcoin. The trading and withdrawal fees should be factored in for carrying out this kind of payments.

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