The Essential Thing to Know About Rising Bitcoin Fees - Sundiata Tech

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Thursday, November 30, 2017

The Essential Thing to Know About Rising Bitcoin Fees

Bitcoin price seem unstoppable. On Tuesday it went beyond $10,000 setting a new all time high. It posted another all time high on Wednesday morning, only to drop 20 percent in the Afternoon.

Nevertheless, the cost of transactions seem a major preoccupation of some potential local investors as last week’s data showed that volumes in Nigeria declined N1.393 billion from N1.575 billion it saw two weeks ago.

We asked some experts what are the major drivers of rising fees and what users should expect. Here are some of the things we now know from their responses:

Fees are a function of amount of data stored on the blockchain. For every byte you store on the blockchain or network, there is a fee charged. It is actually possible to pay more when you buy less bitcoin while you pay less when you buy more.

Bitcoin fees are denominated in bitcoin.  Although we are always paring bitcoin against the dollar, you do not get to pay fees in dollar but in bitcoin. If a transaction cost 0.0001 bitcoin some two years ago, that same transaction could cost more today given that the price of bitcoins are no longer what they used to be. Hence, you can say that as prices rise, transaction fees are bound to rise.

Growing demand does affect fee charges. This is basic elementary economics, the more people want a product the less the supply and more the price. Growth in demand can cause network congestion increasing the likelihood that transactions are processed slower. Exchanges charge higher fees to ensure that transactions process is faster. Bitcoin miners prioritise which transactions are confirmed first based on a bid process. Those paying higher fees get to be included first before those paying lower amount.

Rise in price affects rise in fees. In real terms however, bitcoin fees have not risen considerably remaining at an average of 0.0001 for the majority of the year. The main problem lies in the scaling solutions which while proposed, have not materialised.

Users bid for charges. In a situation where there are more transactions waiting to be confirmed than there are those getting confirmed, individuals start to outbid each other to get their own transactions included first, this end creating a fee market. But if you do not want to charged higher then be willing to wait for a day before getting your transactions confirmed.

Experts say there could be solutions. One of them could be the lightning network they expect to bring back low fees for smaller transactions. For now, all users can do is wait and see if the implementation does go according to plan as the technology is unveiled.

Rising fees are not a threat to adoption as compared to their fiat counterparts. They remain a fraction of what others pay using third-party payment processors such as the Western Union. Many pay huge fees in addition to having to wait days for transactions to be processed. This remains one of the advantages bitcoin has as transfers are faster and cheaper for the majority of users.

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