Rising Transaction Costs Can Prove To Be Bitcoin’s Own Enemy

In the past one year, the popularity of Bitcoin has increased manifold times. Bitcoin, the strongest and largest cryptocurrency, by market cap, has turned out to be a preferred investment option not only for retail investors but also for many of the big financial institutions. The result is that many institutions are now developing several financial investment products around Bitcoins.

However, the rising popularity and investor participation has grown to such huge extent that it is slowly turning out to be difficult to manage huge orders and as a result, has reflected into a considerable increase in the transactions costs of trading Bitcoins.

With huge investor participation, the mempool (Memory Pool) has grown beyond proportion and the network fees have turned out to be exuberant. Moreover, there has been a huge increase in the number of unconfirmed transactions and the problem is just aggravating as the situation gets from bad to worse.

Senior economist and executive director at CME Group - Erik Norland - has published an article explaining how the rising transactions costs can well possibly trigger a Bitcoin crash in the near future.

Drawing a leaf from the past, Norland notes that both during 2010 and 2013, the average transactions costs were spiked considerably following a severe correction in Bitcoin price. This was indicative of the fact that Bitcoin was overbought in comparison to its actual network utility. In 2010, the cost per transaction reached to the Bitcoin price itself which was then valued at $30. While in 2013, Bitcoin surged to nearly $1000 before correcting severely following the collapse of Bitcoin exchange - Mt. Gox - and the cost of transaction reached as high as $80.

The current cost of a transaction has reached $74 and Norland says that this could be ominous” for bitcoin and could portend another correction”. He further stated that With the price of bitcoin now around $10,000 as of this writing, could the market sustain transaction costs of $80, $100 or more without demand and prices collapsing?” he asks. The answer to this question is not known at the moment, but we will likely find out at some point in 2018 or 2019.”

However, it needs to be noted that this research is only based on mere past events and doesn’t consider the fact that a lot has been changed since 2013 in the Bitcoin market. The investor participation is at a record high and continues to grow further. Moreover, Bitcoin is now being seriously considered not only by the retail investor but also by big institutional investors and financial institutions alike.

Bitcoin futures contracts that have just gone live are further expected to bring a lot of stability in the much volatile Bitcoin market. Also, as developers are working aggressively to solve the scalability issues, and if the solution for the same arises in the near future, it can again bring the transactions costs down.