Bitcoin Fee Estimation: How To Know Optimal Block Fee Pricing?

Bitcoin comprises of blocks. The blocks can be described as some transactions that are currently restricted to less than or equal to 1,000,000 bytes. This means that only one block can be created within an average of 10 minutes. Blocks are created by what is known as a bitcoin miner. Once created, a miner can choose the transaction it prefers within the block.

A miner gets paid a transaction fee for each block that it mines. It is, therefore, in its interest to ensure that it fully maximizes the total amount of money it makes once it has created a block. As such, what a miner does is select the 1,000,000 transactional bytes to guarantee that it will be paid the highest amount.

Therefore, when you look at it from the miners’ perspective, the bitcoin miner does not really care about the transactional value. Rather, it all comes down to the size of a block. Remember that the miner cannot exceed 1,000,000 bytes. It is why a miner will not take into consideration the fee of each transaction, but opts to instead concentrate on the fee that will be earned from each byte.

What Makes The Fee Estimates Be So High?

At a first glimpse, it will look as though the fees are extremely high. But the reason behind this is that they rely on confidence levels. Normally, the confidence levels are at 95 percent. What this means is that if a block is located immediately, you would require 20 bytes/Satoshi. However, it might take another 60 minutes before a new block can be located. In the meantime, new transactions will have already started coming in. There are instances where you will not need to have such a high confidence percentage, though.

In conclusion, it is critical to understand that fee estimation is a complex problem. The estimator will be trying to provide answers to questions about the future by using an incomplete picture obtained from the past transactions.