mia-carpets
28
Dec

Food For Thought: Blockchain Transactions Looking A Little Pricey

The entire cryptocurrency markets are down in tandem today, thanks to news that the S. Korean government is out there trying to cockblock crypto traders from getting more profits. Granted, this is probably nothing more than a temporary setback in prices – nothing unusual and certainly nothing we haven’t seen before.

More importantly, however, take a look at this chart of the transaction costs of engaging with the bitcoin blockchain. This chart is certain to raise some questions. Have a gander:

 

Here’s how it works. To interact with the blockchain, in other words, to put a transaction on the blockchain, the user must pay a small fee. In the bitcoin blockchain, that fee is paid in bitcoin, on the ethereum blockchain, that is paid in ether, etc.

Now, the fundamental premise of using the blockchain in the beginning, was to create a system that would bypass 3rd parties such as banks, who were unreliable, and provide users the free transfer of funds to one another. These transactions would be made through the blockchain, where they would be encrypted for security via computing power that was decentralized. To incentive others to lend their computing power they would offer a small reimbursement in the form of a cryptocurrency. Paying a small fee is fine, since nothing in this world is actually free, and we’d all rather pay out digital money to strangers than pay real money to our bankers now, wouldn’t we?

Fast forward to December, 2017, and Bitcoin is trading up at $15k+, per coin. Well that’s great for owners of the coin but wait a second, that must mean transaction costs have gone up too, no? Think of it this way, the blockchain is the network for making transactions and bitcoins are the cost to access that network. Just last week, the average transaction cost on the Bitcoin blockchain hit a high of $55/per transaction, skyrocketing up a gazillion times what it was a month before – a monumental amount just to enter a transaction into the blockchain. Perhaps I’m crazy, but isn’t the whole point of using BTC to make financial transactions so that we can avoid paying egregious bank fees? You’re actually paying more now using the blockchain.

This doesn’t bother me – I neither interact with the Bitcoin blockchain nor do I own bitcoins – I am merely a fan of the markets, a popcorn-eating spectator on the sidelines. My point is, however, the incentives are no longer aligned. Logically speaking, everyone involved with the bitcoin blockchain – users, developers, bitcoin owners, speculators, enthusiasts, should have interest in seeing their asset appreciate. The higher the price of BTC, the happier they are. Not anymore. We’ve come to a point now that the prices have become so absurd that users of the BTC blockchain are going to seek alternatives since it is simply too expensive to use.

What does that all mean?

If I were to guess, I would say that we are either at or close to reaching the ceiling of what BTC could be worth. Technically, it could go up in perpetuity, governed by the laws of supply and demand, but it wouldn’t make sense being that cryptocurrencies are actually used as fees somewhere. Like any other fees, eventually you reach a point where people start caring and move onto other blockchains not denominated in BTC. Will that cause a rout in BTC prices? Perhaps. We’ll find out shortly.