Bitcoin does not solve low transaction fees

It is sometimes argued that bitcoin solves the issue of high transaction fees in the banking industry. I also hoped this was true when I first investigated bitcoin but it is not true. Bitcoin primarily solves digital decentralised electronic value transfer not low transaction fees. Digital decentralised electronic value transfer remains intact and valuable despite rising transaction fees. Low transaction fees are preferable to high fees but these are a lower priority outcome and might not be possible to achieve in bitcoin at the moment.

Transaction fees (denominated in fiat; ZAR, USD, GBP, etc) were originally low when BTC user numbers were low and BTC price was low. Fees have risen over the past two years because of two (linked) reasons 1) BTC user numbers have increased quickly and 2) the BTC price has increased rapidly. More users = more transactions = more data. In order for transactions to be processed users need to pay higher fees in BTC. Moreover, higher BTC price relative to other currencies implies that the costs in those other currencies are ballooning.

Developers are working intensively to solve the cost increases and have already made a number of great improvements to the network over the past two years (segregated witness SEGWIT, for example, can lower transaction fees by reduced the data requirement of each transaction). The extent of capital inflows into BTC implies that there is now significant capital to invest into rectifying these cost issues so I expect more progress going forward.

However, I’m sure you can appreciate that developers are chasing their tails. The quicker they innovate and solve the cost issues, the better BTC appears as a technology, the more new users on the network, the more transactions there are and the higher transaction fees become. There is unlikely to be a perfect solution to BTC cost issues imminently due to the exponential adoption curve. When adoption stabilises then tech innovation might be able to stabilize fees.

Despite the fact that BTC fees have been rising steadily this doesn’t completely detract from BTC use cases. Yes, it is not feasible to buy a cup of coffee with BTC due to high fees but this is not the only type of monetary transaction possible. Remittances and immigration, for example, are a different type of transactions with higher valuations and higher fee structures in our current financial system. Both these types of transactions make sense on the BTC network, despite the increased costs, which shows that there remains value in the BTC network.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s