The Path to Lower Fees
Disclosure: This article is for information purposes only and should not be considered as investment or tax advice.
Fees. No one likes paying them, but they are a necessary component of the financial cycle. Bitcoin and other cryptocurrencies are designed to be peer-to-peer systems that cut out the middle man. Nonetheless, someone must still verify the transactions and add them to the blockchain. Fees exists because the entity verifying transactions must be compensated. Cryptocurrencies backed by blockchain technology are seen as secure because of this compensation system. However, the energy and effort required to perform this verification process still costs money. As such, the miners processing transactions are well within their rights to expect some form of payment. Decreasing energy costs, coupled with increasing computing power will help maintain a reasonably stable fee. For a truly reduced fee structure developers and miners will both have to be put under more pressure from the cryptocurrency environment.
At this point in time there is not significant pressure to decrease the fees associated with trading cryptocurrencies for several reasons. The most important factor is the fact that transaction counts are relatively low. Currently, Bitcoin’s transaction count is lower than Ethereum’s, while the average fee in USD is higher. On Dec. 2, 2017, Ethereum had around quadruple the number of daily transactions, at just over 2 million. While the fee in USD is lower compared to Bitcoin transactions, it is still prohibitive for daily purchases.
Comparing the top five cryptocurrencies by market-cap to daily transactions on Amazon really brings the low transaction count to light. According to an Amazon press release from 2016, they sold over 600 items per second on Amazon Prime Day. This equates to well over 51.8 million transactions in one day, from only one retailer, albeit a massive retailer. Out of the top five cryptocurrencies by market-cap, only two break the million transaction mark. Ethereum had over 2 million transactions on the date of writing, while Ripple smashed through 500 million. Ripple is making a name for itself as the low transaction fee cryptocurrency, so perhaps those wishing to reduce fees should research their strategy.
These transaction counts of cryptocurrencies matter, as they form an inverse relationship to fees charged on them. As transaction counts rise, fees should decline. As prices stabilize, transaction numbers should rise and confidence in that particular cryptocurrency will increase. When and if this occurs, fees should really begin to decrease as a benchmark pricing is established and miners, exchanges and other major players are able to better valuate their efforts.
While there is no threshold of daily transactions that must be reached in order for a cryptocurrency to be labelled as a ‘real’ currency, suffice it to say that the number must multiply several times over. As more retailers begin accepting cryptocurrencies as payment more transaction opportunities will exist, transaction counts will go up, prices will stabilize, and fees should be reduced. Until this happens, fees charged on cryptocurrency transactions are likely to remain the same, barring any massive technological overhauls.
Cody Atkinson13 Posts
Cody is a consultant from Canada who is passionate about helping others achieve their financial goals. Heavily favouring fundamental analysis in all investment decisions, the excitement surrounding cryptocurrencies unlocked a passion for technical analysis as well. In this epoch of technological and digitized investment options, Cody believes it of utmost importance to maintain a close watch on the evolution of blockchain technology. After all, it has been the driving force behind the market disruptions, and success or stagnation of different cryptocurrencies.