Are you excited to get started with crypto and buy your first Bitcoin or Ethereum? You’ve heard so much about the decentralized, free (as in “freedom,” not as in “beer”) nature of cryptocurrency that there’s something you may not see coming.
Crypto isn’t that different from your bank, PayPal, Venmo, Western Union, or that gas station ATM in that it also comes with transaction fees. Whatever you’re planning to do with cryptocurrency, you’ll need to factor those in.
Not sure what kinds of transaction fees you might encounter once you start buying and selling crypto? You will be after you’re done with this beginner’s cheat sheet.
Blockchain (Network) Fees: The Cost You Can’t Get Away From
Blockchain fees are the transaction fees you can’t escape, because they’re an integral part of how cryptocurrencies work — and what makes them decentralized. Every transaction has to be recorded on the blockchain, and its integrity depends on checking if all data is accurate. A massive computer network made up of individual computers is behind that consensus mechanism, and the individual nodes within it need an incentive to take part.
That’s why you pay gas fees, also called blockchain or network fees.
The precise process depends on the mechanism.
Proof of Work
Bitcoin and some other cryptos use a Proof of Work (PoW) mechanism to validate transactions. Computers rush to solve complex math problems — the crypto mining you’ve heard so much about already. The first miner that solves the problem gets to add a new block to the blockchain, but that process is pretty electricity-intensive. Miners are encouraged to stay active through your transaction fees.
Proof of Stake
Many newer cryptos instead use a Proof of Stake (PoS) concept. This process involves validators who create new blocks, chosen because they’ve staked crypto as collateral. It’s faster and cheaper, but there are still transaction fees.
Gas
This is a process specific to Ethereum, and it refers to the computation power needed to finish the transaction. More complex transactions take more gas, and therefore cost more.
How Are Your Blockchain Fees Determined?
Besides the consensus mechanism used for a cryptocurrency, some other things also go into determining how much you’ll pay for a transaction.
Some of these are within your control — larger transactions cost more on Bitcoin, for example, and Ethereum lets you choose to pay higher or lower gas fees, which then impact how quickly your transaction is completed.
Others aren’t. For many blockchains, fees rise when the network is busy and many people are making transactions. That includes Bitcoin. Either way, these fees (as irritating as they might be) aren’t avoidable because cryptocurrency wouldn’t work without validation mechanisms that keep the blockchain intact.
The Fees Crypto Exchanges Charge
What’s the first thing you do after deciding you’ve waited long enough — and you want to start experimenting with cryptocurrency now? You’ll choose a crypto exchange, like Coinbase, Kraken, Gemini, or Binance, right? Well, those exchanges also (nearly always) charge fees. They’re not in it for free. And their fee structure can seem quite complicated when you first get started.
Trading Fees
Crypto exchanges charge trading fees — that is, you’ll have to pay something every time you buy or sell cryptocurrency. The amount usually depends on how much you’re buying or selling. Larger volumes are good for the exchange, and they’ll bring down your fees a little. Besides that, fees are also different for “makers” and “takers.”
You’re a maker if your order adds liquidity to the order book — for example, you place an order to buy Bitcoin when it reaches a preset value, but you’re not buying right away. You’re a taker if you want to buy crypto right now, and you don’t care about the price. This removes liquidity from the order book.
That gets a little complex, but as a beginner, you need to know two things. If you’re buying crypto for the first time (for example, $500 worth of Bitcoin), you’re a taker. Takers pay higher fees than makers.
Withdrawal Fees
The exchange holds your crypto for you, and you don’t have access to your private key. (That’s a custodial wallet.) When you want to withdraw some of the crypto you hold to your own wallet, there’s a withdrawal fee. That fee covers the blockchain fee needed to process the withdrawal, but it can also include an additional cost, something that depends on the exchange you choose.
Exchange Fees
You pay a fee when you exchange dollars for Euros, and coin exchanges are really no different — except you pay to convert fiat to crypto, or vice versa. There are also crypto-to-crypto exchange fees, although those tend to be lower. Those fees aren’t usually exorbitant, but they do exist. Read about fee schedules before you choose a crypto exchange to influence the amount you pay in your favor a little, and also keep in mind that some exchanges have lower fees for “VIPs” or people who trade large volumes.
Staking Commissions
If you stake cryptocurrencies that use Proof of Stake (like Ethereum) through a crypto exchange, you’ll earn rewards — but the exchange will take a commission.
What About Wallet Fees?
You’re in luck here. Most software crypto wallets don’t charge fees to use them. Many are open-source projects and don’t make money at all, but if they do, they do it through side projects. Those include dApp integration, swaps, and donations.
The fees you pay when you use software wallets are the blockchain fees we talked about earlier, and it’s good to understand that the wallet service itself doesn’t charge.
Custodial wallets are a different matter. That’s where you pay a custodial service to hold your crypto (your private key). The crypto you hold in a coin exchange falls into this broad category, but those exchanges make money in different ways. What we’re talking about here is a cryptocurrency custody service, usually used for crypto ETFs. Those services do usually charge monthly fees.
What Are Layer 2 Solutions, and How Do They Affect Fees?
Good question.
You might have heard that layer 2 solutions are built on top of layer 1 (the main blockchain itself), so that a secondary network can handle crypto transactions — freeing up the main network and making the process both faster and cheaper.
Not all blockchains use layer 2 solutions. Ethereum is the strongest example of one with many different layer 2 solutions. Examples include:
- Optimism — which assumes transaction validity unless there’s a challenge (an “optimistic rollup”) and creates transaction batches before moving back to layer 1.
- Arbitrum works in the same way and has even lower fees.
- Polygon, a sidechain with very fast transactions and low fees.
Using layer 2 solutions can drastically slash the fees you have to pay for your transactions, and most reputable wallets support this option now. MetaMask, the Coinbase Wallet, and the Trust Wallet all let you move to layer 2 when possible, for example. Depending on your transaction volume, that could bring your fees down to the equivalent of mere cents. Plus, everything will be faster. It’s a win-win.
Are There Any Other Hidden Crypto Costs You Should Know About?
Of course! You might encounter fees that we haven’t looked at yet while buying, selling, depositing, withdrawing, and trading crypto — but not all costs are fees. Some are just an inevitable part of dabbling in cryptocurrency.
What do you have to know before you buy your first little bit of crypto? Let’s do a lightning round on that!
Slippage
This is the difference between the price you expected for the trade and the price at which it’s actually executed. Despite what the name suggests, that can be favorable (positive slippage) or not (negative slippage). This concept isn’t unique to crypto. It applies to the stock market, too.
In crypto, as in other contexts, slippage can happen because of low trade volumes (less liquidity), high trade volumes (market pressure), large orders flooding the market (suddenly changing market prices), and natural market volatility (you’ve seen it already!).
You can reduce the risk of negative slippage by placing limit orders (being a maker), staying off the crypto playground during times of market turbulence, and trading during high-liquidity periods.
Volatility
If you’re completely new to crypto, go spend some time with the market. While major cryptos like Bitcoin and Ethereum tend to be slightly more predictable, and stablecoins (tethered to the dollar or something else, like the price of gold) like Tether are even more so, the market does what it wants. Fear (panic selling) and greed (grabby buying) can set in at any time, and the value of your crypto right now can be very different from what it was just an hour (or even a few seconds) ago.
That’s fine if you’re using crypto for speculation. It’s less nice if you’re using it as a payment method.
Crypto Cards
Some exchanges — like Coinbase and Binance — offer crypto cards, similar to bank cards. These come with fees, and those fees can be very high. You can expect to be charged for transactions, conversions, and inactivity.
ATM Fees
Crypto ATMs might be convenient, but they don’t come with friendly price tags. Some have withdrawal and deposit fees as high as 20 percent — and the exchange rates they offer aren’t great (to say the least), either. Avoid crypto ATMs if you can.
Wallet Loss
We’re now coloring way outside the lines of the main topic — crypto fees — but this is definitely a hidden cost to consider. Hardware wallets can be lost, damaged, or stolen, and so can paper wallets. “Brain wallets” (remember your key) can be forgotten. Software wallets can be hacked, or a scammer may be able to manipulate you into revealing your private key.
Scams
This is a big tent that includes a lot of items. Phishing, investment scams, and so-called pump-and-dump schemes (“shitcoins”) all fall into this bracket. Know your stuff. Don’t give your private key to anyone, ever, and stay away from weird links in your inbox. When you’re new to crypto, stick to major coins with a proven track record (Bitcoin, Ethereum, Tether, etc) and don’t dabble in memecoins or less familiar choices.
Critical Tips for Crypto Noobs Hoping for Lower Fees and Costs
You’re now armed with a fairly detailed picture of the fee structure you can expect when you start out with crypto. You know that blockchain fees aren’t a rip-off but an integral part of how crypto works (and stays secure) — but you’d still like to pay as little as possible for your transactions.
Some good ways to do that include:
- Really shopping around before you settle on a crypto exchange. Fees vary rather a lot.
- When you’re ready, try to be a maker. Place limit orders to increase liquidity, and benefit from the lower fees that come along for the ride.
- Don’t trade crypto during the busiest hours, when fees are higher. (This can really work in your favor if you’re in a time zone where crypto is generally less popular — but everyone can find a good time!)
- Layer 2 solutions are great. Learn how to use them as soon as possible, especially if you’re trading Ethereum. Most software wallets work with Optimism, Arbitrum, and Polygon now.
- Don’t get phished (starting with always being vigilant and never clicking on random links or answering random questions). Don’t give your private key to anyone. For the love of all things good in life, don’t think you’re a suitable candidate for a “brain wallet.”
- Steer clear of crypto ATMs. In most cases, they’re not worth it.
Above all, start by investing in small amounts of crypto. Give yourself wiggle room to play around and learn how it all works. It’s not an overstatement to say that crypto is a little scary at first, so starting small is the best gift you could give yourself. Commit to learning one thing about fees as fully as possible, and then move on to the next bit.
With time, you’ll get a good feel for crypto — and you can increase your investment from there.
