I’m going to pick on my colleagues over at Bloomberg Tech and their allegations that Bitcoin is suffering some sort of backlog. You guys are wrong! Bitcoin is doing just fine.
Complaining about a Bitcoin transaction backlog is like complaining that Ebay has a backlog because 90 people bid on a Honus Wagner baseball card and only one person got to win. I could bid a penny on Honus Wagner all day long, and still not get a card. That’s not a backlog; that’s just a crappy offer price.
See, a sad fact of capitalism is that goods and services cost money. Processing a bitcoin transaction is a service that miners perform in exchange for money, which they need to pay their electricity bills. Did bitcoin users presume that the network is a public service run by benevolent cryptoanarchists?
Bitcoin transactions are priced by size, like, BTC/kB. Transactions vary in size because you can combine multiple inputs and outputs and add programmable instructions. But a one-input-one-output transaction is about 192 bytes, and a reasonable fee for that transaction might be about 0.0002 BTC, or 25 cents. The fee is the same whether the transaction value is a million dollars or a nickel.
So here we have Roger Ver complaining that he paid $78 for his bitcoin transaction. Right, the transaction contained 416 inputs, so it was effectively 416 transactions squashed into one. 18.75 cents per transaction is not bad! And this is irrelevant, but the total transaction value was 32.5 bitcoin, or about $39,000. $78 is effectively a 0.2% transaction fee!
https://t.co/6EeRmpwLyF just paid $78 in TX fees for a single Bitcoin transaction. https://t.co/FVq16Vzqq9 pic.twitter.com/mOwHnaFPWP
— Roger Ver (@rogerkver) January 5, 2017
Transaction fees have gone up recently, but overall transaction costs have stayed the same. Decreased, even. The cost of a transaction is what miners receive for including a transaction in a block. That’s the fixed block reward plus a fee from the user. The block reward is the creation of new bitcoins, which is effectively inflation, so people don’t really think about it, but it’s still a cost. Block rewards decrease by 50% every four years, and the last decrease was last July, so transaction fees had to increase to compensate. The good news is that the inflation rate has gone down.
The bigger issue is that people don’t understand how to calculate bitcoin transaction fees, so they submit cheapskate transactions and get all confused when miners don’t want to include them. Here is a pretty good tool for estimating transaction fees and expected wait time. A lot of the wallet software out there sucks and doesn’t do this for their users. Bitcoin could stand to be more user-friendly.
Finally, transaction fees are denominated in BTC, but people whine about them in dollars. Even if the transaction fees haven’t gone up much in terms of bitcoin, the dollar-denominated price of bitcoin has increased by a lot, so the transaction fees look a lot higher these days when considered in dollars. But it’s not Bitcoin’s fault that your stupid fiat currency can’t hold its value.
See Also:
Someone Wants to Stick a Fork in Bitcoin –BloombergView
Elaine, you’re extremely intelligent & you know Bitcoin inside & out. You wear your heart on your sleeve, which is why you champion Bitcoin even though it trades based on the greater fool theory. Within ten years Bitcoin will reach its ending value: namely, zero
I disagree, but feel free to come back in 10 years and say “I told you so” 🙂
Agreed…The stupid Bitcoin ‘currency’ may end at zero today, it is down 10% in only a single morning’s session (03/22/17) alone (I wonder if Elaine knows when the last time the USD did that).
The USD did that a lot between 1971-1973: https://history.state.gov/milestones/1969-1976/nixon-shock
Ok, so that was 44 years ago…Bitcoin (95% traded on Chinese exchanges) was down almost 10% only 24 hours ago but you are calling the USD the ‘stupid’ currency (when in reality it is the ‘stupid’ yuan that is driving up bitcoin).
sure, yuan is stupid too. Keep in mind that bitcoin is only 8 years old and has maybe .2% the market cap of USD. Gold prices were pretty volatile in 5000 BC too.
Agreed Bertie…A piece about the exciting new blockchain technology, which may soon replace the current ‘silly’ intermediaries that make transaction settlement costs higher and make trade settlement wait times longer would have been great for sophisticated investors. This piece is for those greater fools in the USA (gambling of gold) or in China (gambling on bitcoin).
This holier-than-thou attitude is honestly pretty off-putting. The biggest problem with these transaction costs is not that they exist, but that they really have no predictable correlation with the final transaction processing time. A 20bp transaction fee right now already sounds horrendous; that might be cheap from the perspective of a Western Union, but it’s certainly not low by any measure. How high will that go?
But more importantly; how much does any one person have to pay in order to be guaranteed that their transaction will be processed within the next three minutes, let alone seconds/milliseconds? Answer: there is no amount that can guarantee that, as far as I understand.
As for the final cheap shot against USD, I mean, come on, that’s preposterous. When tulip bulbs rocket 25,000 guilders, one wouldn’t argue that the guilder is a trash fiat currency that lost its value. Come on.
Here is a really good tool that tells you how much a person has to pay in order to make sure that their transaction will be processed within the next 0-10 minutes: https://bitcoinfees.21.co/
There, I just solved your problem 🙂
BTW, nobody was trying to use tulip bulbs as a currency during the tulip bubble. That I know of.
“so the transaction fees look a lot higher these days when considered in dollars. But it’s not Bitcoin’s fault that your stupid fiat currency can’t hold its value.”
It’s not that fiat isn’t holding its value. You can see this by comparing Bitcoin vs. dollars vs. any basket of goods and/or services. You’ll see that the value of Bitcoin’s has increased relative to eggs, cows, oil, cotton, etc.
Since the cost of something is what you must give up in exchange for it, Bitcoin transactions have actually gotten more costly in real terms. I now have to forgo more eggs/cows/oil/dollars/cotton/etc for each tx I send as compared to in the past.
A Bitcoin transaction costs 0.01 BTC whether the market price of Bitcoin is 2 cows or 5 cents or a million dollars. Similarly, one egg costs ~8% of a dozen eggs whether the market price of a dozen is $4 or $400.
If you think transaction fees are too high, then you must think that the price of *Bitcoin in general* is too high. That is a fair complaint and I don’t disagree.
This analogy doesn’t work, because one egg is 1/12th of a dozen eggs regardless of the price of eggs. You seem to be claiming that the market price of a transaction being included in a block will be 1/100th (or some constant fraction) of a Bitcoin regardless of the price of a Bitcoin or the demand for Bitcoin transactions. This is a bizarre claim. Do you have some reason to believe transaction demand and BTC price should perfectly cancel each other out? It seems we should expect demand for Bitcoin transactions denominated in BTC to vary with BTC price. Your graph showing relative stability in this metric only looks like that because it includes the block reward which is constant in each epoch and so far is much larger than fees.
That’s the point! Transaction fees are 15% of the block reward. The fees started increasing last July when the block reward halved: https://btc.com/stats/fee
Very few blocks are actually full, so transaction demand doesn’t really matter – miners will ignore low-fee transactions. https://blockchain.info/charts/avg-block-size
Look at the bottom graph in the first link you posted, showing tx fees per KB. This should be enough to prove to you that your theory that tx fees are constant (or constant per KB) at a given block reward is wrong.
Very few blocks are full? Look at https://blockchain.info/blocks/1490146834109. The vast majority are 999 or 998 KB. Looks like most (but a lower %) of blocks were full back in August too: https://blockchain.info/blocks/1478591634109.
I have no idea what sort of economic theory you’re relying on that makes you think user demand doesn’t affect transaction fees.
You just cherry-picked two days’ worth of data out of the last 8 years, but sure let’s roll with that 🙂
Okay, so the free market determined the current transaction fees. Even denominated in US Dollars, the average cost per transaction is still the same as what it was a year ago: https://blockchain.info/charts/cost-per-transaction?timespan=all
The only difference now is that a higher proportion of the cost is paid through transaction fees instead of inflation.
Good article.
A few people commenting still don’t get bitcoin. They seem to think putting their fingers in their ears and saying ‘lalalalalala’ is going to make it go away.
1stCrass, you’re not following, nobody is saying bitcoin should go away…As a store of value, yes; as a currency hedge, sure; as a payment method for economies without widespread credit card or banking access, absolutely; but the USD is ‘silly’, no (Think cartoon of person long bitcoin while it loses 15% in the past three days thinking ‘This is fine’)…Saying the USD is ‘silly’ is something that stackers say to substantiate gambling the rent money on Another Shiny Coin.
I’d be curious to hear your thoughts on the current backlog of BTC transactions that is at 161,000+ and growing rapidly. Bitcoin Cash topped out last night at $2,600 or so while BTC fell to $5,500 and has since rebounded.
Where do you stand now, eight months later, in relation to where you stood ideologically with regards to Bitcoin?
Well, Bitcoin is up to almost $8000 right now, and Bitcoin Cash is about $1100. Word on the street is that the Bitcoin network is constantly being spammed by BCash supporters, but who knows.
I think the fighting and volatility will go on for awhile, but I believe Bitcoin will prevail in the end.
Crazy what a difference a few days makes, huh?