Bitcoin has been on a rampage in 2021, with the price hitting an all-time high of well over $60 000. To put it into perceptive is a 3x appreciation since December 2020. When prices move so rapidly and positively, it naturally begins to catch institutions and retail investors. As Bitcoin miners sell part of their treasury of newly minted coins to cover the cost of securing the network and confirming transactions, buyers are grabbing them off the market faster than ever before.
This buying pressure has seen the limited supply of daily Bitcoin taken off the market and pushing up the asset's price.
The buying frenzy also means more transaction volume on the blockchain as holders of the asset want to secure their balances on-chain in a non-custodial format. The more activity on-chain, the more users need to pay for miners to grab their transaction from the pool and add it to the next block of transfers.
The competition for transactions drives up the price of transfers, and as in the case of the previous bull run, critics are coming out against the cost of transferring Bitcoin.
During the crypto boom of 2017, Bitcoin transactions were as high as $60 and over the last year its ht as high as $25 per transaction. Yes, the transaction cost is high, but we have to look at why the prices are escalating before we criticise the network.
The importance of securing your balances on-chain
Bitcoin, like gold, can be held in a non-custodial format, which is the digital version of taking over the physical delivery of an asset. When you purchase gold, you could keep it with a bank or storage provider of your choice and access the vault when you need it. This is similar to how Bitcoin left on exchanges work, they are promised to you, but they are not in your possession.
When you take over physical ownership of your gold, you bring it home or place it in a vault sitting on your property. The same can be done with Bitcoin by securing your transaction on-chain. Instead of allowing a third party to manage your coins, you can set up a wallet that only you have the codes to access.
Once this wallet is set up, you can transfer your funds to the wallet and take physical delivery of your Bitcoin. The issue with taking physical delivery is that you need to broadcast this transaction to the network. Nodes have to review the transaction, and miners need to validate it into the blockchain.
The Bitcoin blockchain has limited resources.
The process of validating a transaction may seem simple for the user; you send Bitcoin from one wallet address to another, reflecting shortly. However, in the background, a host of computational resources are working to make sure that transactions are confirmed in a secure and decentralised manner.
When you sign a transaction on the Bitcoin blockchain, you transfer that transaction to the mempool. Miners review the transactions available and grab as many high paying transactions as possible to add to the next block as they have a profit incentive to pick the best paying transactions.
The higher the fees, the better chance your transaction is settled first; since Bitcoin can only handle seven transactions per second, there's a race for resources, and a bidding war ensues as users increase the fee to try and speed up transaction times.
It costs to move ownership or store of value.
Yes, $25 - $60 makes on-chain Bitcoin impractical to use for daily transactions like the fabled buying a cup of coffee. Still, when you're moving hundreds, thousands or millions of dollars in value, the price becomes negligible.
Bitcoin, like any store of value, requires costs to secure and move ownership.
When you transfer stocks from your broker-dealer, you pay a fee
When you transfer a home to another owner, you pay a fee
When you transfer forex, you pay a fee
The higher the asset's value, the more often than not, the fees will keep pace, and Bitcoin is no different. As it appreciates, Bitcoin becomes an investment with a trillion-dollar market cap, moving it will begin to cost more.
If we compare it to other stores of value, like real estate or stocks, we can see that the cost of moving Bitcoin of the same value would be far cheaper.
On-chain balances can be moved cheaper.
However, many still regard Bitcoin as a currency and claim that increased on-chain fees make micro-payments and daily transactions uneconomical. Some have used this as a case for why Bitcoin will fail and why fiat is a superior currency; others claim that their altcoin provides the solution. Yet many of these altcoins do not have the volume of transactions Bitcoin have, so how can you claim you've solved a problem you've never experienced.
We've already seen second in line Ethereum start to suffer from scalability issues, with gas fees reaching as high as $100 to perform a transaction on their network.
Scaling is indeed a big issue for Bitcoin, and solving it in a way that doesn't compromise the network in terms of decentralisation and security is a tough ask. But solutions are on their way, be it in their infancy; Bitcoin developers have launched a second layer solution known as the lightning network.
This second layer solution allows users to lock up Bitcoin in an account like a chequing account for your Bitcoin. Once your account is funded, you can send and receive Bitcoin at near-instant clearance at meagre costs.
The lightning network is only three years old and will take time to mature, but it offers users an alternative for transferring Bitcoin, bypassing on-chain fees and in a trustless, decentralised environment.
Once the lightning network is fully adopted and operational, we'll see a micropayments layer living on top of Bitcoin while the main-chain can still be used to secure large amounts of Bitcoin in a safe and secure manner, giving all users an option to use the chain for their various transactional needs.
About the author
Che Kohler is the co-founder of nichemarket, a South African Business Directory and digital marketing agency. He is an avid blogger who specialises in writing about marketing tech and cryptocurrency.
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