[A]s bitcoin has soared in popularity it’s become too expensive to use in small transactions.
The problem came to a head in early December, when Steam, the popular downloadable video game store, announced it would stop accepting bitcoin payments for games, citing the currency’s volatility and high transaction fees. Steam relied on a bitcoin payment system called BitPay. Among BitPay’s other customers are Microsoft, online retailer NewEgg, and APMEX, which sells precious metals online.
The surge in fees was a matter of supply and demand. As bitcoin’s price surged from $10,000 to $20,000, increasing numbers of people wanted to invest in the cryptocurrency. The upsurge in users and transactions increased the demand for miners’ services.
But another, related factor was at work too. Mining fees, which are paid by individual users to miners, are actually optional; bitcoin users don’t have to pay them. But they usually do, because the fees encourage miners to record their transactions sooner rather than later. The sooner you want a transaction written to the blockchain, generally the higher mining fee you’ll have to pay.
The article goes on to state that where prices are volatile—and potentially fall—people are willing to pay a premium for execution. Furthermore, costs rise due to the fact that exchanges charge more for hosting transactions the busier they become.
The idea of skyrocketing transaction costs rubs, of course, against the very idea of bitcoin—which was always presumed to be a means of nearly anonymous, P2P, efficient (and cheap) transaction. But it does also raise central questions about the robustness of the bitcoin blockchain, and the viability of bitcoin as a serious substitute to government-backed fiat currencies.
Ironically, these concerns are not the first to strike (quasi)monetary systems. Indeed, throughout the history of medieval commodity systems, as I document in my book Minilateralism, gold, too, would—though for different reasons—become too expensive for small transactions. Time will tell if technology will ultimately serve as a solution to the problem—or merely serve as the source of its own undoing.