- >Ask CryptoVantage: Is Bitcoin Better for Small or Large Transfers?
Ask CryptoVantage: Is Bitcoin Better for Small or Large Transfers?
A benefit of non-government controlled digital currencies like bitcoin is that they can be used to quickly transfer money around the world. Geography and borders are not a barrier. However, when it comes to the size of transfers, there are certain limitations to take into consideration. In this article we discuss the key factors you need to understand when deciding when and how to use bitcoin for both small and large transfers.
Billy Garrison | Nov 26, 2020
Transaction fees are the first, and arguably most important, factor to consider when making a transfer of any size with bitcoin. Transaction fees impact how quickly your transaction will be confirmed on the blockchain, but they are also volatile and difficult to predict.
The size of a transaction fee is not dependent on the size of the transfer (i.e. you do not have to pay more in transaction fees in order to make larger transfers). It is up to the person transferring the funds to decide on what size of transaction fee they want to pay. The larger the transaction fee, the faster the transaction will get added to the bitcoin blockchain.
However, choosing a transaction fee is not quite that straightforward. During times when there are an increased number of bitcoin transactions taking place, demand for space on the bitcoin blockchain increases, and so do transaction fees. During these “peak” times, there can be backlogs of transactions, and you may have to pay more in transaction fees to have your transfer added to the blockchain quickly. An additional point to consider is that transaction fees might be higher if your transaction involves a lot of data – for example, if you are bundling together multiple balances into one bitcoin transaction.
It is important to choose a transaction fee size that makes sense for your situation. For example, if you are making a small transfer, it might not be worthwhile to spend a lot on transaction fees, but if you are sending a large amount then you may want to pay a higher fee.
As mentioned above, the time it takes to settle your transaction (i.e. have it added to the bitcoin blockchain and therefore be confirmed) depends on how much you are willing to pay in transaction fees. In general, it can take between 10 minutes to 1 hour for a transaction to settle on the network.
As you can imagine, the time it takes to settle a transaction is very important, especially when it comes to small transfers. For example, you may be willing to wait 1 hour for a transfer worth hundreds of thousands of dollars. But if you are buying a coffee, even waiting 10 minutes is not ideal. And in order to confirm your small purchase quickly and move on with your day, you may need to pay increased transaction fees, but that could potentially double the cost of your original purchase.
In these situations, “layer 2” options can be extremely useful. Layer 2 refers to technologies that are built on top of the bitcoin network. A great example of a layer 2 bitcoin technology that solves many of the issues with small transfers is the Lightning Network. The Lightning Network allows small transactions to occur “off-chain”. This means that multiple small transactions are bundled together and added to the bitcoin blockchain at once. This both increases the speed at which you can perform small transactions, and decreases the transaction fees for each individual small transfer. The downside to layer 2 technologies like the Lightning Network is that there are security trade-offs compared to using direct, on-chain transactions. For this reason, the Lightning Network is ideal for small transfers.
In general, the Lightning Network is good for transfers worth less than $100. On-chain transactions are best-suited for transactions worth more than $50. But it is important to consider the volatility of transaction fees when deciding what the best option is at the time of transfer.
For more information about the Lightning Network, take a look at our article “What is the Bitcoin Lightning Network?”
The bitcoin network can be used for both small and large transfers, but you may want to consider using layer 2 technologies like the Lightning Network for small transactions. The important things to consider are: the size of your transfer and how much security you require, the volatility of transaction fees at the time of transfer, and the amount of time you are willing to wait to have your transaction confirmed/settled on the bitcoin blockchain.