Will bitcoin transaction fees ever get better?

Posted: 15 December 2017 2:06 pm


Any good news is still a long way off.

Bitcoin transaction fees hit a then-outrageous then-peak of US$20 average on 12 November 2017. It smashed that unseemly record on 8 December, and since then its average transaction fees have been riding at over US$20.

It's not hard to see the connection between bitcoin prices, unconfirmed transactions and transfer fees.

Sources: Bitinfo, Blockchain.info, Coindesk

What these numbers show

  • Average transaction fee: The mean transaction fee per bitcoin transfer in US dollars.
  • Unconfirmed transactions: The number of pending transactions awaiting confirmation, in tens of thousands. This generally indicates how long transfers take.
  • Bitcoin price: The bitcoin daily high, measured by thousands of US dollars.

It's obvious enough that high prices are driving user uptake, which clogs up the network. But what's less obvious is just how immediate the correlation is.

The correlation might be running in both directions too, with network difficulties keeping a lid on bitcoin prices.

Will it get better?

It's safe to say that bitcoin will need to solve this problem if it wants to go further. The good news for investors is that the upcoming bitcoin Lightning Network update should help a lot. The bad news is that it might be better on paper than in practice.

What's the Lightning Network?

The Lightning update is a major change for bitcoin.

In oversimplified terms it basically it works by creating a whole new series payment channels on the network which can be used instead of the main blockchain based system. Peer to peer transactions on the Lightning Network can theoretically be done with almost nonexistent transaction fees.

So instead of clogging up the blockchain by sending every single transaction through it, the bulk of them will run outside the blockchain entirely. The nodes that form the Lightning payment network will, however, be connected to the blockchain.

Fees on the Lightning Network are paid to the node operators, and will be taken as a percentage of the transaction plus a slight flat amount. This will facilitate microtransactions, but means it won't be much good for larger transactions. Those stay on the current blockchain instead.

Theoretically the Lightning Network could solve the current bitcoin transaction problems. But in the real world it's not quite as easy.

The first problem is that there's still no date for the Lightning Network rollout. It's currently undergoing testing, but it's almost certainly going to be months before it's ready for release.

The second problem is that even once it is ready, it will require willing uptake from bitcoin users. People will need to go out of their way to actually set up those Lightning nodes and start using it. The scale of this obstacle can't be overstated.

Consider Segwit (segregated witness) . This update was released in August to reduce the amount of data involved in each transaction. Essentially you can fit more Segwit transactions onto one block. This improves transaction times and reduces fees.

But now, almost half a year later and with the bitcoin network slowed to a crawl, fewer than 10% of transactions actually bother with Segwit. This is because it's a bit of a hassle and requires some additional steps to use. Bitcoin in general isn't the easiest-to-use currency, especially for newcomers, so a layer of complication like Segwit naturally goes unused.

It's very clear that simply having a viable solution isn't enough. People actually need to start using it.

Plus, the Lightning Network actually requires Segwit in order to work. The Lightning Network upgrade is still under construction and probably won't be ready for months. But even if was ready to go today, people still wouldn't be using it.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Cryptocurrency news

Latest crypto guides

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms of Use, Disclaimer & Privacy Policy and Privacy & Cookies Policy.
Go to site