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But, but… I thought Bitcoin was supposed to be cheap?

Summary:
Total transaction fees in bitcoin are on the ascent, challenging a key claim put forth by bitcoin acolytes in the early days: that the bitcoin payments network could compete with the mainstream banking system on cost.Some are inclined to disagree this was ever the case. So here’s a quote from Nathaniel Popper’s seminal investigation into bitcoin mining in 2013, noting:Miners, though, are among the virtual-currency faithful, believing that Bitcoin will turn into a new, cheaper way of sending money around the world, leaving behind its current status as a largely speculative commodity.But, it must be stressed this cheapness rhetoric was everywhere at the time. Even Bill Gates was pushing the line that bitcoin’s best attribute was its cheapness. We disagreed, noting the costs were only being

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Total transaction fees in bitcoin are on the ascent, challenging a key claim put forth by bitcoin acolytes in the early days: that the bitcoin payments network could compete with the mainstream banking system on cost.

Some are inclined to disagree this was ever the case. So here’s a quote from Nathaniel Popper’s seminal investigation into bitcoin mining in 2013, noting:

Miners, though, are among the virtual-currency faithful, believing that Bitcoin will turn into a new, cheaper way of sending money around the world, leaving behind its current status as a largely speculative commodity.

But, it must be stressed this cheapness rhetoric was everywhere at the time. Even Bill Gates was pushing the line that bitcoin’s best attribute was its cheapness. We disagreed, noting the costs were only being disguised temporarily by the mining award system — and that this wouldn’t last for long.

Reality, however, is finally catching up with bitcoin. Fees are escalating due to capacity constraints being imposed on the network on account of blocksize limitation as well as the reduction in bitcoin mining awards:

But, but… I thought Bitcoin was supposed to be cheap?

If unresolved such constraints will impede further scaling of the network and make bitcoin prohibitively expensive for day-to-day transaction use.

Thus far, however, a have-your-cake-and-eat-it solution has escaped the developer community with all options on the table introducing some sort of compromise, whether that’s to bitcoin’s security or its decentralised and trustless nature. And, naturally, because this is the anarchic utopia bitcoin, nobody can agree on how to proceed anyway.

And things are getting testy.

This week, Bitcoin’s primary broker-dealer and deposit taker, Coinbase put out the following note (our emphasis):

Network transaction fees: We will discontinue paying network transaction fees for on-chain transactions starting March 21st, 2017. Network transaction fees do not go to Coinbase, they go to the miners of the Bitcoin and Ethereum networks. Since our inception, we have been paying network fees on behalf of our customers to help support the growth of the bitcoin and ethereum networks. We now have over 6 million users worldwide, and this has become a significant cost. Fees will be assigned dynamically based on the current network conditions and will be paid by customers when they send an on-chain transaction. Transactions between Coinbase accounts will continue to be off-chain and free.

It’s worth noting that Coinbase is cutting down on other key free services as well, signalling costs are beginning to matter to bitcoin business models as they try to transform themselves into profitable ventures and away from charities.

Some are keen to point out that as a whole (i.e. when cost savings from the reduction in mining awards are accounted for) transaction costs remain at historical lows:

But, but… I thought Bitcoin was supposed to be cheap?

But none of this changes the fact that the system is not free to operate and that obscuring the true operating costs of the bitcoin network with “inflation” (bitcoiners use the term inflation to describe dilution/money printing) was always a smoke and mirror exercise.

Either way, bitcoin is fundamentally threatened.

In an inflationary system, transaction costs are disguised/subsidised by capital investors prepared to buy and hold bitcoin. Those who want to use bitcoin as a transactional currency benefit. This is good for the cultivating the perception that transactions are cheap, but it’s bad for the perception that the underlying is scarce or a good store of value. It also makes the network incredibly vulnerable to mass redemption risk.

In a fee-based system, costs are passed onto those who use bitcoin primarily for transaction purposes to the benefit of asset holders. That’s good for capital investors (less dilution), but bad for the merchant/user currency adoption — which in turn existentially threatens the value of bitcoin anyway. (What’s the point of having a million bitcoins if no merchant in the world — even those in the black market — can afford to accept them?) In short, this is equivalent to biting the hand that feeds you.

The key lesson of course is that there is no free lunch. And that mainstream transaction costs are high for a very good reason.

• This lesson applies to free web services as a whole, not just bitcoin, hence we maintain the view a day of reckoning — or web perestroika — is coming with regards to the sustainability of many of these services.

Related links:
Bitcoin – FT Alphaville coverage
Bitcoin cognitive dissonance of the day, Bill Gates edition – FT Alphaville
Bitcoin Miners Signal Revolt Amid Sluggish Blockchain – Bloomberg

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Izabella Kaminska
Izabella Kaminska joined FT Alphaville in October 2008, which was, perhaps, the best time in the world to become a financial blogger. Before that she worked as a producer at CNBC, a natural gas reporter at Platts and an associate editor of BP’s internal magazine. She has also worked as a reporter on English language business papers in Poland and Azerbaijan and was a Reuters graduate trainee in 2004.

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