Bitcoin's Transactional Downfall Giving Rise To Altcoins

Written by: Bor Kračun, 18. 5. 2021
Transaction fees for a cup of coffee

We’ve all heard it – a vision of a future where one can buy a cup of coffee with Bitcoin. But in today’s world, this is simply unrealistic.

 

The reason?

 

Rising transaction fees crippling real world viability of many cryptos. Luckily, Bitcoin isn’t the only player in the game and many cryptocurrencies pose to be the solution to this problem.

What Causes a Change In Fees?

If we take Bitcoin as an example, fees are based on the amount of data a transaction holds. This is determined by how many inputs and outputs the transaction has. So large transactions with many require a higher fee, as they contain more bytes of information.

 

The more important factor for fee price is market congestion. As block space is limited and a block is mined on an average of 10 minutes, people try to outbid each other to secure their place in the next block. With a coin like Bitcoin that has a 1MB block size, congestion is the biggest reason for price spikes in its fee. If you set a low fee, because of the long block time, being put to the back of the line could mean very long delays.

When Bitcoin price soars, so do transaction fees. A repeat of 2018 is apparent.

Then why does it appear as if the value of Bitcoin dictates its fee?

 

Because it still does. As Bitcoin’s value rises, so does interest in the coin. What follows is an influx of new people, driving traffic to new highs leading to a rise in fees. Bitcoin’s price is very much an influence on its transaction fees.

Rising Transaction Fees
In 2021, a repeat of 2018’s rise in transaction fee costs can be seen across most cryptocurrencies. The rise is most noticeable in Bitcoin, where the average transaction fee has at one point even reached $60 and is now hovering around $20. Other major cryptos are following this trend, effectively making smaller transactions completely unviable.
Bitcoin’s fees make small transactions a waste
But not all cryptos. There is an observable difference in use between cryptocurrency with high fees and cryptocurrency with low fees. In most cases, cryptocurrencies with high fees carry transactions that are of higher value – the median value of a transaction in Bitcoin over the last weeks is around $960 at an average transaction fee of around $30.
Bitcoin Cash is a well-known alternative to Bitcoin, its best use case being for small transactions

Looking at a crypto that promises cheaper and faster transactions such as Bitcoin Cash, data shows it’s being used more for smaller transactions, at a median transaction value over the same period of around 75$ at a $0.007 average fee.

 

Bitcoin Cash transaction fee is, after an initial period after being introduced, consistent and isn’t fluctuating as much as Bitcoin’s, for example. This is because of a larger block size meaning a higher limit on the amount of transactions that are confirmed, leading to less competition to be confirmed fast. This pairing is also a good indicator of the importance of block size, as the average block time is the same at 10 minutes, yet BCH fees are tiny compared to BTC fees.

High Fees Hamper Usability

If Bitcoin, Ethereum and other cryptos with high transaction fees are taking center stage, it’s hard to see cryptocurrency as a digital cash, and if the fees associated with these currencies continue to rise, cryptos like Bitcoin are destined to only be stores of value, not a currency for everyday use.

 

This is where other cryptos can break through. If we look at cryptocurrencies like Bitcoin Cash, Litecoin and Dash, this use case scenario is exactly the one they are tailored for. Being fast and cheap, transactions with such coins are ideal for sending smaller amounts.

 

Ironically, the biggest crypto hit of 2021, Dogecoin, is not optimized for low transaction fees, and the massive influx of new people, meaning many more transactions, has sent the average fee skyrocketing. Along with a general rise in value, this places it in the bracket of coins with which large amounts of money are sent.

Why Use Cryptos With High Fees?

The most important advantage of coins like Bitcoin and Ethereum is security. This is also the reason why sending large amounts of money makes sense with these currencies, as sending $1000 and paying $30 for transaction confirmation makes sense for ensuring that your transaction is safe.

 

Cryptocurrency networks that promise small fees and fast transactions are often less secure. This is a problem especially with Bitcoin Cash, as it’s seen as so insecure by exchanges, that the amount of confirmations they require to accept a deposit is so high, the time advantages of fast confirmations are lost. Dash works around this issue with “masternodes” – special nodes that process transactions either extremely quickly or with an emphasis on privacy, breaking transactions into smaller amounts and scrambling the information to make the sender and receiver anonymous. Transaction fees associated with Dash are also consistent and low, having been stable after 2018’s high.

Why Even Pay a Fee?

Paying a fee is paying a miner to confirm your transaction upon mining a block. Setting the fee higher gives them an incentive to confirm your transaction faster. If traffic is high, transactions rise as space in a block is limited, so the fees rise accordingly, as many want to have their transactions confirmed as soon as possible.

 

In most cases the currency’s value influences fee pricing, so it makes sense to think that stablecoin fees must be fixed. Fees for coins with stable value like Tether are still subject to fluctuation as transactions must be confirmed in the blockchain. In Tether’s example, many users are moving off the Ethereum blockchain with smaller transactions because fees are too high, they move to other blockchains like Tron, for example (Tether is can be used on different blockchains).

 

There are, however, cryptos with no fees. The one worth pointing out is Nano. It is the most well-known among fee-less cryptos, yet in a broader scope, it should be more appreciated than it is at this moment. Along with $0 transaction fees, they themselves take a couple of seconds. It confirms transactions with something called Open Representative Voting, making the system lightweight, energy efficient and very fast. Its security is also well integrated so for ultra-fast and cheap transactions, Nano takes the win.

To Conclude…

Right now, the major cryptos are used for large transactions as their fees are so high, small amounts could cost you more in fees than the amount you’re trying to send. Considering this has already happened in the past and is happening again, a consistent rise in fees makes it apparent why many see them only as “digital gold” – not something to be traded in every day.

 

Other coins propose solutions by being designed to guarantee smaller fees and faster transactions but often suffer security concerns, resulting in smaller transactions. There are even coins with no transaction fees, but they are not as popular as others, as compared to them, they are relatively new.

 

So, is buying something like a cup of coffee with crypto realistic? Definitely, but most likely not with Bitcoin, unless you want to pay 10x its price or a week in advance.

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