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Bitcoin’s transactional costs have been increasing right after the May 12, 2020 block reward halving. The average cost per transaction is around $6 which is not all-time levels but still overall concerning for the industry that prides itself on low transaction costs and decentralized existence. Let us see how the increasing cost will affect the sector both in the short term and long term.
Bitcoin’s Disruption of Global Money Transfer Economy
Bitcoin was founded back in 2009 but has come a long way since then. Not only did it disrupt the financial markets and introduced innovations in fintech, it also spearheaded the development of decentralized consensus networks. The main premise of the whole movement remains centered around Bitcoin’s ability as an alternative currency or means of exchange with low fees and free of government overreach and control. This allows more and more people to make digital transactions and own global currency.
Block Reward Halving
Bitcoin is different from the current fiat currencies of the world i.e. US Dollar, GB Pound, Euro and others in many ways. One of the main differences however is that the creation of new currency units is limited. Every 10 minutes or so, a new block of currency is formed and shared among miners who have dedicated valuable computing resources to the network in an equitable manner. This block reward is worth 6.25 BTC right now but before May 12 this was double i.e. 12.5 BTC. This process of halving the reward occurs every four years in the Bitcoin network and changes the fundamental dynamics of it. It ensures that Bitcoin will always have a deflationary price mechanism rather than an inflationary mechanism adopted by the Reserve/Central governing banks around the world. This is why Bitcoin users believe their currency will be worth a lot more in the future and keep on rising against the USD continuously.
Since miners’ reward is cut to half, they raise their other source of income which is the transaction fees. Normally, the competitive mining process keeps the transaction low, the fundamental change to the system through the halving creates a shortage of miners and thus they are emboldened to charge more. The average increase in the transaction costs due to the May 12 halving has been around 20% overall.
Surprised?
While the figure seems high enough, the truth is that the cryptocurrency community was expecting the transaction costs to increase. This is because historically, the transaction costs have increased after a halving and miners operate on a free market model. It is also expected that the fees will eventually reduce after a few months and return to within 10% of the pre-halving transaction costs.
What is the Cost of Conventional Transactions?
Even with the increased transaction costs, Bitcoin is still a lot cheaper than transactions offered by conventional banks. While smaller transfers are somewhat expensive, bigger amounts are still one of the cheapest in existence of digital transactions. Banks have also been increasing their transaction costs for some time. A typical transaction cost of an international wire transfer is anywhere around 2-3% of the total value. While this may not seem much but amounts worth millions of dollars can cost around tens of hundreds of dollars, even with a reduced transfer rate of 0.5%. In a modern world where the number of transactions is often high, this can mean thousands of dollars lost in transaction fees for a medium sized business. The median cost of transaction is around $35 which is even with the increased rate, 7 times more than the average transaction cost of Bitcoin transfers.
How do they Fair Against Bitcoin Transfers
Cryptocurrencies especially Bitcoin have much lower fees than conventional money transfer approaches. Historically, users have moved a considerable amount of Bitcoin with a fraction of the total cost involved in a conventional fiat transfer. On October 16, 2018 someone moved around 29,999 BTC ($194 million at that time) for just $0.1 to make a point. This is figuratively peanuts compared to the tens of thousands of dollars that would have been incurred in a conventional wire transfer overseas.
Another big holder transferred 99,504 Bitcoin on September 6, 2019 ($970 million at that time) for just 0.0607 BTC ($670 at that time). This is one of the biggest transactions in fiat terms ever recorded in the history of Bitcoin and the transaction cost is still lower than a $5 million bank transaction.
While Bitcoin transfer fees are not fixed like in bank transfers and can be quite dynamic overall, the cost even with the increased percentage is still much, much lower than the cost of an alternative bank transfer.
The Future
Despite these inherent advantages over conventional transfers, Bitcoin still has a lot of challenges that it needs to face in the future to become a truly credible global means of money transfer. The volume of transactions is still quite low overall compared to the global traffic and if the public goes on to adopt it, there will be serious tests of its transactional capacity in the future. The costs are also expected to increase in the future as mining becomes more and more competitive with time and the block reward keeps on reducing. However, cryptocurrency enthusiasts and experts believe that the decentralized network is capable of overcoming these challenges as it has successfully done over the years.
But, as of this moment in time, Bitcoin is much cheaper and even faster as a means of currency transfer than banks and payment companies. It poses a direct challenge to the current order and is likely to continue disrupting it in the near future, forcing banks to innovate and cut costs on their own.
