Fees as high as $28 are destroying bitcoin's value for small payments.
Originally, one of bitcoin's big selling points was that payments would be fast, convenient, and cheap. "The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions," wrote bitcoin founder Satoshi Nakamoto in the white paper announcing the technology.
"With bitcoins, transfers can take place across continents and timezones with no problems, no timelags, and only minuscule transaction fees," wrote economics reporter Felix Salmon in 2013.
Until the beginning of this year, bitcoin fees tended to be well below $1, and often less than $0.10. Bitcoin supporters liked to point out that fees on the bitcoin network were often a lot less than the fees merchants paid to accept credit card payments. But in recent months, bitcoin's popularity has outstripped the network's ability to cope with growing demand.This is a point raised by the Google engineer in his twitter thread in the post below:
As a result, the bitcoin network today is a radically different animal. Fees are high—the average transaction yesterday cost around $28. And that is having huge implications for the ways bitcoin is being used and the kinds of businesses being built on top of it. Indeed, companies that are trying to realize Nakamoto's vision of bitcoin as a platform for "small casual transactions" are starting to shift to alternative networks, because it's impossible to support small transactions when each transaction costs $20 in fees.
Rising transaction fees have been a huge headache for Bitpay
Consider Bitpay, one of the first successful bitcoin startups. Bitpay makes it easy for ordinary businesses to accept bitcoin payments. Bitpay accepts payments on merchants' behalf and offers the option to immediately convert the payments to dollars or other conventional currencies, insulating merchants from bitcoin's volatility. In the early years, Bitpay could accept payments that were just a few pennies.
But over the last year, the bitcoin network itself has seen fees go higher and higher. And Bitpay has been forced to raise transaction fees in response.
"Now that fees are reaching an average of $1 per transaction across the bitcoin network, it's becoming uneconomical for users to make micropayments under $1," Bitpay wrote in a March blog post. Bitpay also announced that it would start charging customers for the transaction fees Bitpay itself faced when it received a bitcoin payment.
Bitpay also started getting complaints about slower payment times thanks to the increasingly congested network. The way the bitcoin network deals with congestion is essentially by auctioning off scarce capacity to the highest bidder. Customers have the option to pay a higher fee in exchange for immediate delivery or to pay a lower fee and wait until congestion declines enough to make room for lower-fee transactions. As fees rise, this becomes a more and more dicey proposition....MUCH MORE
I decided to start with a relatively small transaction first, which makes the $20 fee look absolutely ridiculous— Ted (@TedOnPrivacy) December 12, 2017