As bitcoin lurches from crisis to controversy and back – again – here I am writing another soap opera review that would put Eastenders to shame. Bitcoin is in gridlock, Reddit’s gloves are off, and everyone’s paying for it with long delays and exponentially rising fees that just hand more power to the miners (whose attitudes and tribalism seem not insignificant in perpetuating the block size melodrama – coincidence?) Dinner is served, but only at the captain’s table.
Yet this month has seen bitcoin prices peaking near $1,300 , riding high on the Winklevoss/ SEC anticipation, before taking a near-$200 dive, then recovering to a very pleasant and surprising $1,233 at the time of writing. Having stayed above $1,000 for over a month, in spite of the Winklevoss failure, bitcoin is really showing its strength and popularity right now. This may well be sustainable in the short term, but what does it mean for the future? Now that BitPay has increased its minimum fee from just 4 cents to $1, can bitcoin remain attractive to the man on the street?
Aren’t full blocks supposed to be a good thing?
It depends who you ask. Obviously, full blocks represent an efficient use of the network’s resources, which should translate into value for money. So what’s going wrong? Well, like all things in bitcoin, it’s complicated. With the block size still locked in at 1MB, capacity is hobbled. Demand is throwing 350,000 transactions per day into the system, but the network can only handle 300,000. So 50,000 transactions – the lowest value ones of course – are delayed or stuck in the mempool. Not a good look for the world’s leading cryptocurrency. You don’t have to ask around much to be reminded that none of the altcoins have this problem (though you could say they’d kill to have this problem, but that’s another story…)
Full blocks on a network with enough capacity to handle everything that’s thrown at it, however, would be an excellent thing. Just don’t expect that to happen easily – or any time soon.
Why are fees going up when miners are already being paid?
Transaction fees are nothing new. But the costs involved have risen exponentially over the last quarter, so much so, that bitcoin is starting to feel like eBay. The more you’re willing to pay, the faster your transaction is processed. This is known as the fee market; miners get to choose which transactions to include in their blocks. And with the system buckling under the weight of too many transactions, this puts them in an enviable position. The more congested the system is, the higher the fees they’ll collect. And all the while the blocksize debate rages, perpetuating the cycle. Now I’m not a conspiracy theorist, but if you’re a miner that’s a happy coincidence…
This month BitPay have revealed their fee payments have risen from less than $3,000 per month only a year ago to more than $50,000. Every month. Paid to miners. Miners who already collect bitcoin as remuneration for processing transactions and creating new bitcoins. So to insure themselves and their customers against loss-making transactions, BitPay increased their minimum invoice amount from $0.04 to $1. That’s a huge increase with far-reaching implications.
Imagine you’re buying a cup of coffee. You have your wallet open, and your friendly barista is eager to accept your bitcoins. Remember, this scenario is bitcoin’s raison-d’etre. But your $3 cup of joe has an almost zero chance of being processed straight away. Certainly not within the time it takes to order and drink it. In fact, you could pick the beans and grind them yourself before your barista gets his money – and that’s before you factor in the cost. Are you willing to pay a whole extra dollar just for the privilege of paying in BTC? Hell no! You’re going to reach into your pocket and use something that works.
From fee market to flee market?
So bitcoin must decide. Is it a currency, or is it a commodity? Because the winners are winning bigger and bigger, while risking making everyone else – and ultimately themselves – losers. Our inability or unwillingness to tackle the block size debate as a matter of urgency puts our entire ecosystem in peril. It’s too easy to put it off while prices are dancing in the rafters, but if we push the man in the street away, there are dozens of other coins he can use instead. Whoever gets to the mainstream first becomes the go-to coin. Do you really want it to be Ethereum?
This article represents the personal opinion of the author and is not a recommendation to buy or sell Bitcoins.