Bitcoin transaction fees hit yearly highs near US$6 as prices rose
Is Bitcoin ready for prime time again? Both the main chain and the Lightning Network say no.
One of the factors thought to have stalled out the late 2017 Bitcoin peaks was the fact that transaction fees were getting ridiculous, with average Bitcoin transaction fees rising to around $50 at their peak. That, and the fact that the bubble most likely just burst under its own weight.
Now that the markets are ferociously heating up again, people are starting to ask whether Bitcoin will be able to hold up, or if it's going to congest again.
People are correctly pointing out that this time is different, and that Bitcoin has developed a lot of additional scaling properties in the price downtime of 2018. But none of it has really been put to the test yet – until now.
Let's walk through some pretty (and educational) pictures to see how it's doing.
How high are Bitcoin transaction fees?
A good place to start is by looking at Bitcoin transaction fees measured in USD. Here we can see that the fees overall directly correlate with Bitcoin prices and hit a new 2019 average high of almost $6 when prices scraped $14,000.
That's pretty expensive, and quite clearly unsuitable for actual day to day payments.
But it's also not an entirely fair measurement. The fees are paid in Bitcoin, so the same fee is simply worth more when prices rise. If we actually want to see how the network is holding up, we want to look at how congestion impacts fees, not how price impacts fees.
To do that, we'll want to look at fees measured in BTC instead.
When we do that, we can see that the high fees are mostly a reflection of price rather than actual congestion or network activity.
They peaked out at about 1,000 Satoshis per byte on average, but have tended to cap out around 200 through most of 2019. The current fees are nothing too extraordinary, and on the whole the network is holding up pretty well. It's doing especially well when you consider that network activity has been trending upwards throughout most of 2018 and 2019 to date, and is coming back up to its late 2017 peaks.
The good news is that the scaling solutions implemented by Bitcoin over the last odd year are making an enormous difference, and have already proven to be crucial to the Bitcoin network.
The bad news is several things.
The bad news
The first piece of bad news is that the $3 to $5 per transaction ballpark is what Bitcoin looks like when it's doing well. All the improvements are making a huge difference, but it's still not the most incredible payment performance.
The second is that Bitcoin hasn't really been put to the test yet.
Let's go for a swim in the mempool. The mempool is where the Bitcoin network keeps all its impending transactions.
This is the mempool from the start of May 2019 to now. Where it builds up into those peaks, you're looking at a backlog of transactions which results in higher fees. As you can see, the usual procedure is for them to build up at times of high activity until things die down enough for them to get swept out. When you make a Bitcoin transaction, it's queued up in that pool before a miner packages and sends it. It's a system where those who offer the highest transaction fees go first. The blue-green stripes at the bottom are the lower bidders, while the yellow-red at the top are the higher bidders.
For congestion itself to really start driving fees you need to get to a position where the backlog doesn't get cleared out. If Bitcoin prices start bucking upwards again, that could be what happens here.
The latest rise saw network congestion reach its highest point since 2018, with about 80,000 transactions caught up in the backlog at its peak. Educated guesses suggest that sustained market activity from Bitcoin would be enough to put the network back into a congestion coma.
It's still too early to say for sure though. This is still only a several-day backlog, while at its peak Bitcoin was backlogged for several months.
It disproportionately hits new users though. If you don't know about this, you're more at risk of opting for a fee somewhere in the blue range, which could see transactions get stuck for several days. It's hardly the most welcoming experience for the bit-curious.
How about that Lightning Network though?
The Lightning Network is being held up as Bitcoin's best hope of handling enough transactions to actually serve as a feasible micropayments network. It's a way of sending Bitcoin transactions with fees of just cents rather than whole dollars.
It works as a miniature side network for people to make Bitcoin transactions through pre-funded payment channels. To use it you basically create a Lightning Network node and then run channels to other nodes. You can then send payments to other nodes with low fees, either by connecting to another node directly or making several hops to them through intermediary nodes.
The most notable takeaway is probably that Lightning Network capacity has dropped as Bitcoin prices rise.
Capacity in this case refers to the amount of money locked up in the Lightning Network. The channels need to be pre-funded, so that money is kind of like the grease that keeps the network running. The orange line shows Lightning Network capacity as measured in Bitcoin, and the blue line shows capacity measured in USD.
What does this mean? It means people running Lightning Network payment channels are taking their coins to the market when prices rise, which counter-intuitively makes the network less useful right when it's needed most.
Perhaps it doesn't matter though. The need to pre-fund payment channels means the Lightning Network will never work as a viable widely used payment method in the real world, because it will always be functionally inferior to plain fast and cheap on-chain transactions.
What does this mean for Bitcoin?
The upshot is that Bitcoin is definitely much faster and cheaper than it used to be, which is good. The downshot is that it's still not fast and cheap enough for another sustained bull run, and that the Lightning Network is a lot of fun but not particularly practical in the real world.
In the end, it seems Bitcoin is pursuing a "digital gold" paradigm by necessity of its inherently slow architecture as much as anything else. And it's working.
It's all a bit ridiculous, but that's monetary value for you.
Disclosure: The author holds BNB, BTC at the time of writing.