Can someone explain how the transaction fees get paid, even with bitcoin CP? When someone places a bet in XCP, how and when do they send BTC for the transaction fee? Do they actually need two currencies for betting or any other operation in CP?
It depends what you exactly mean by "transaction fee". From the bitcoin network point of view, placing a bet (or any other action in CP) is just a normal bitcoin transaction (with some 80 (40) additional symbols the network does not care about). So the bitcoin miners get their fee from there just like from any other normal bitcoin transaction.
I was really asking about the process the user goes through to pay the BTC fee. I haven't used Counterparty, so I was wondering about how you place a bet in XCP in the CP client. After completing the XCP transfer, do you then need to open the bitcoin client to pay a .0001 BTC fee. It seems a bit cumbersome.
User doesn't pay any BTC fees (apart from the miners' fee). No need to open the bitcoin client unless user is involved in an operation explicitly involving BTC.