Late Thursday night I was struck with the sudden inspiration to begin trading cryptocurrency. I created a Coinbase account to access the small amount of bitcoin that had been gifted to me during the holidays and I was pretty disappointed.
I had 0.002 of a bitcoin, roughly $25, an amount that I believed would cost more to transfer than its worth. After all, bitcoin transactions fees were at their peak as much as $50 or more.
I went through with it anyway and moved the fraction on a token to my Binance account anyway. What did I have to lose?
That’s when I received this in an email: “You paid 0.00023846 BTC ($2.35 USD) in network fees.” I was pleasantly surprised to see just how little that was, a reflection of just how much transactions fees have dropped since their dizzying heights.
The world of cryptocurrency is difficult to pin down into absolutes, but there are a couple of factors that are more than likely working together to drive bitcoin transaction fees downwards.
4. Fewer Transactions
According to Blockchain.info there are roughly 190,000 daily bitcoin transactions. At the peak of the cryptocurrency market surge in December 2017, there were almost 400,000 daily transactions, and fees skyrocketed.
Bitcoin is a software that requires thousands of computers to operate concurrently. There’s a limit to how much data these machines can process at once. The price for transactions increases when there’s a lot of traffic demand, sort of like Uber’s surge pricing.
This is what is known as bitcoin’s scalability problem. Transactions can only be written into its blockchain at a certain rate. Once the network’s capacity has reached its limit, it can become backlogged and transactions could possibly take an entire day to be recorded.
Luckily, developers have began implementing possible solutions to this issue, which could also be causing the decline in transactions fees.
3. Segregated Witness
This proposed bitcoin software update, commonly referred to as SegWit, has been successful in solving multiple issues in the bitcoin blockchain.
SegWit is an example of a “soft fork,” or a change in bitcoin protocol beginning at a certain block. This new transaction type rearranges how data is stored in bitcoin blocks, boosts transaction capacity, and is compatible with old versions of the software.
This soft fork allows for the creation of second-layer solutions to make transactions even quicker. The most popular one is known as Lightning Network, which was proposed in 2015 and has been adopted by bitcoin and Litecoin.
This protocol creates transaction channels outside the bitcoin blockchain, allowing users to move funds to multiple, predetermined locations. Once funds have been adequately distributed, a final version of these transactions is written into the blockchain. It’s sort of like only submitting a final draft of a transaction, instead of having to make multiple transactions on the blockchain.
Payment protocols like Lightning Network, powered by SegWit, have been touted to be the solution to the aforementioned scalability problem. But according to SegWit tracking site SegWit Party, under 15 percent of transactions have been completed using the protocol.
So while SegWit might be helping alleviate network congestion, it is certainly not the sole reason for lower transaction fees.
2. Batching Transactions
Another technological improvement that might be contributing to declining fees is “batching.”
Cryptocurrency exchanges, like Coinbase, have to write every individual bitcoin transaction into the blockchain. This is time-consuming and ineffective. An exchange called ShapeShift recently announced that it would be bundling many transactions into one. This would save time and allow its computers to write multiple transactions into a block at once.
ShapeShift only makes up about 2 percent of the transfers on the bitcoin blockchain. There is limited data regarding how many exchanges are using this method of processing transactions, so it’s hard to say how much of an impact it is having on fees.
1. Declining Hype and Interest
Simply put, there has been a steep decline in the amount of people interested in bitcoin as a whole. Google Trends data suggests that since the market crash in December 2017, the people searching for bitcoin have steadily sunk.
The declining hype around the token indicates that there are fewer people interested in buying or trading it, which would result in less network traffic.
More than likely it’s a combination of all four of these factors that are driving bitcoin transaction fees down. So if you were worried about moving a small about of bitcoin, now is the time to so.