Why Bitcoin Users May Not Care If Transaction Fees Go Much HigherBy Kyle Torpey
When Bitcoin first hit the mainstream back in 2013, the startups building around this new technology often touted it as a payments-focused innovation. There was still a low level of activity on the network at the time, which meant transaction fees were effectively non-existent due to the excess capacity available.
While the idea of Bitcoin as “digital gold” existed in those earlier days, it was not clear to many people that Bitcoin was really a store of value until the network became congested and transaction fees began to rise.
There was intense debate over the future of the Bitcoin project during this time, and while the main focus of the discussion was around the network’s block size limit, the real argument was over whether Bitcoin’s main focus should be around payments or value storage.
That said, Bitcoin improvements like Segregated Witness (SegWit), which recently hit an all-time high in terms of adoption, have paved the way for Bitcoin to eventually act as both digital gold and a vast improvement over systems like PayPal.
Starting in 2016, many users started to complain about high transaction fees and congestion on the Bitcoin network, but that didn’t stop the price from reaching an all-time high of nearly $20,000 by the end of 2017. At one point, Bitcoin transaction fees included in blocks even surpassed the 12.5 BTC block subsidy.
There was so much speculation around the Bitcoin price in late 2017 that people simply didn’t care about paying $20 to $30 to get their transaction included in a block.
This sort of thinking is likely still prevalent today. Based on various available data, Bitcoin users probably won’t care about Bitcoin fees going much higher over the short term because the crypto asset is still in the early stages of its development — with a focus on becoming a trusted, apolitical store of value.
Bitcoin Exchange Trading Volume and On-Chain Transaction Fees
In addition to the obvious correlation between trading volumes on exchanges and on-chain transaction fees seen during the hysteria around crypto assets in 2017, a similar trend can also be found when looking at this same data from the past year.
As the above chart shows, simultaneous upward movements in trading volume and transaction fees can be seen during some of the most volatile times in the Bitcoin market over the past year. This includes the capitulation event during the bottoming out of the Bitcoin price in late November, the 17% rise in the Bitcoin price on April 1, the further increase in the Bitcoin price around the time of Facebook’s Libra announcement in early May, and the price volatility surrounding various regulatory concerns in late June.
The chart uses Messari’s “Real 10” trading volume data, which only tracks the largest exchanges that are believed to have legitimate trading activity.
With this data in mind, it seems clear Bitcoin’s on-chain transaction fee market is effectively dictated by the level of speculation around the Bitcoin price on a daily basis.
Data from Chainalysis has also shown that around 90% of total Bitcoin network activity has been associated with exchanges over the past three years.
While Bitcoin users may eventually care more about high transaction fees as the digital asset becomes a more viable medium of exchange and not simply a store of value (for the most part), this doesn’t appear to be an issue that will become relevant for some time. There are also solutions in development, such as the Lightning Network, to eventually handle payments in a more efficient manner when this becomes a serious problem.
For now, the vast majority of people who are interacting with the Bitcoin network are simply trying to get their piece of digital gold pie. And for that reason, high transaction fees don’t seem likely to deter many new people from using Bitcoin.