Transaction fees can be as volatile as the coin price. To make things a bit clearer for you, we will be going over everything you need to know about what transaction fees are, how a crypto coin price works, and why they can be as volatile as the crypto coin’s price.
Key Points:
- A transaction fee is essentially a charge that the blockchain users have to pay each time they want their transactions processed within the network.
- The crypto coin price is a reflection of its utility, availability, market, demand, and supply.
- The more volatile a cryptocurrency is, the more transactions will typically occur, which will incur a higher transaction fee.
- The higher a transaction fee a user makes, the quicker they can complete a transaction, as miners will put their transactions within the next block quicker.
What are transaction fees?
Blockchain networks utilize a consensus mechanism as a means of facilitating transactions. This means that miners, or nodes, spread out on a global scale need to be incentivized as a means of processing the transactions if it’s a Proof-of-Work (PoW) blockchain. If it is a Proof-of-Stake (PoS) blockchain, these nodes typically stake their tokens and earn a percentage of the transaction fees as a result of doing so and are incentivized as a result.
These fees play an integral role within the maintenance of the blockchain network and are the difference between the amount of crypto sent and the received amount. They are a reflection of the speed with which a user wants their transaction to be validated, as the quicker they want it, the more they will have to pay in terms of the fees.
What is a crypto coin price?
Purchasing a cryptocurrency grants the buyer direct ownership of that cryptocurrency token. Cryptocurrencies are not issued and are not regulated by a central government and are not subject to any of the monetary policies associated with government currencies.
As such, the price of cryptocurrencies is determined and affected by their supply, the demand of the market for it, the availability of the token, as well as the competing cryptocurrencies available on the market. Another influence over the value of the token is its overall utility, or in other words, what kind of role it fills throughout the native blockchain network it is based on. Its price is a reflection of all of these factors.
Why are transaction fees as volatile as the crypto coin price?
The transaction fee within the blockchain network exists so that the miners can take it into consideration when mining blocks. The Tx Hash is the transaction hash that consists of alphanumeric characters, and it is an identification number given for a crypto transaction.
These txs are taken from the mempool, which is the location where they wait until the miners decide to add them to a block to be validated.
When the price of a token goes up, typically, there are a lot of people performing txs, and since the size of the blocks is limited within the blockchain network, this puts a limit on the maximum txs, which can be processed.
This is why miners will typically prefer to pick those with higher fees and add those txs to the next block. This will cause the mempool to get full of transactions waiting to be added to a block.
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Conclusion
With all of this in mind, the transaction fees are not directly collated to the volatility of the cryptocurrency tokens but are collated to the increase or decrease in the number of transactions that are waiting in the mempool and the number of people that want to get their txs done as soon as possible.
In times of massive price swings of cryptocurrencies, either up or down, there are a lot more transactions that occur, which leads to an increase in the transaction fees, and this is what makes them as volatile as the coin price.