Bitcoin Too Hot for its Own Good – BTC Transaction Fees Skyrocket

The global cryptocurrency market grew by 23% during the rally over the previous few days – equating to a gain of $42 billion in dollar valuation, and a new nine-month high overall.

Here on Sunday morning, more than half of that figure has disappeared already. Bitcoin’s stay at the $7,500 range proved extremely short lived, and BTC/USD is now back down at the $6,850 mark.

Read: Five Reasons Why Bitcoin is Surging

Bitcoin’s success over the past few days has come at a slight cost. As we saw during the height of the 2017-2018 bull run, whenever Bitcoin becomes popular, its blockchain transaction fees skyrocket.

That was the case again this time around, as BTC transaction fees soared to a new 11-month high. At time of writing, the average Bitcoin transaction fee is $2.49. That’s up from $0.77 earlier in May – which itself is still some way above the yearly low of $0.17.

Bitcoin Fees Too Hot to Handle

The chart below shows Bitcoin transaction fees for the past three months.

Now compare that to the Bitcoin price trajectory over the same time period and we see a clear correlation. The peak transaction fee of $2.49 was recorded (today) on May 12th. The median transaction fee also peaked on the same day $1.49.

Those fees apply to a median transaction value of just $409, according to Bitinfocharts. That may only equate to fees of 0.36%, but anyone looking to send a substantially lesser sum would still have to pay roughly the same tx fee.

I tested this myself this morning by sending $10 from a mobile wallet to an exchange. The fee was $1.86 – or 15.95% of the transaction itself.

Fees rise when the blocks on the blockchain get too full. Only so many transactions can fit into Bitcoin’s 1MB blocks. Full blocks result in high tx fees, as holders must now compete to get their transactions through in time.

According to Bitinfocharts data, the BTC block size has been pushed close to its limits for the past three months.

Meanwhile, the number of Bitcoiners using SegWit to move money is perched above 40%. Data from Transactionfee.info.

Is SegWit a Solution?

SegWit refers to nodes on the Bitcoin blockchain which strip out certain data from transactions in order to reduce their size. This in turn allows for more transactions to fit in a single block. SegWit blocks can expand to 4MB, and according to optimists, will be able to handle millions of transactions per second when paired with the Lightning Network.

However, SegWit has drawn plenty of controversy. Many question its security due to the fact that it doesn’t operate fully on the blockchain. Rather, SegWit nodes, or ‘channels’ are opened up, allowing nodes to validate certain data without sending it to the blockchain.

There is a hostile debate taking place right now between ‘big-blockers’ who want to scale Bitcoin on-chain; and the ‘small-blockers’, who want to move everything over to SegWit and Lightning Network, i.e. off-chain solutions.

The legacy of this debate, which started around 2015, can still be felt to this day. The entire Bitcoin Cash hardfork saga was based around the same contentions. And of course, Bitcoin’s adoption of SegWit was the reason that Bitcoin Cash (BCH) split off and became its own coin in the first place.

Bringing this back to very recent events, there’s even a feasible idea circulating that SegWit was inadvertently responsible for the Binance hack. Over 99% of the stolen BTC was sent to SegWit addresses from Binance. Since Binance has not yet adopted SegWit, there’s a strong possibility that its security safeguards weren’t able to register the transaction.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Author:
Greg Thomson is a freelance writer who contributes to leading cryptocurrency and blockchain publications like CCN, Hacked, and others.