What is a Transaction Fee?
The amount paid to miners for including your transaction in a block. Fees are determined by supply and demand.
Why It Matters
Transaction fees are Bitcoin's market mechanism for allocating limited block space. Bitcoin blocks have limited capacity (about 1MB, or 4MB in SegWit weight), creating scarcity. When demand to transact exceeds capacity, fees rise as users bid against each other to get into the next block. During light usage, fees can drop to satoshis per byte. During heavy usage or congestion, fees spike. This fee market ensures that block space goes to whoever values it most highly. Understanding fees is essential because they directly impact your cost to transact. High fees can make small transactions uneconomical. However, fees incentivize miners to keep mining, and they'll eventually replace block rewards as miners' primary income when all bitcoin is mined.
How It Works
Transaction fees are calculated as the difference between transaction inputs and outputs. If you send 1 BTC from a source that required 1.0001 BTC in input value, you're paying 0.0001 BTC in fees (however many satoshis that represents). Miners include transactions in blocks based on fee density (satoshis per byte), prioritizing higher-fee transactions when the mempool is full. You can see what fee rate is appropriate by checking the current mempool—many wallets do this automatically and suggest appropriate fees. Fees can be predicted if you know the transaction size and the current fee rate, allowing you to estimate costs before sending.