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As Bitcoin's popularity continues to grow, transaction fees are also rising, which has led to the continued voice of Bitcoin bears, who are bearish all the way. With an average transaction fee of more than $2, bears are convinced that Bitcoin has a bleak future because no one will spend $2 on payments, especially compared to the much lower transaction costs of credit cards, PayPal, etc.
The problem, however, is not Bitcoin itself, but people’s misunderstanding of it. The soaring price tells a very important message: If Bitcoin is doomed to fail, why do people keep buying it?
This is because Bitcoin's value proposition is not small consumer payments, but rather large and important payments, especially for cross-border payments. Individual small payments can be made in a variety of ways: cash, barter, coupons, credit cards, bank checks, etc. There are many different payment methods around the world.
For international payments, only a few currencies are accepted: the US dollar, the euro, gold, and currencies with special drawing rights (SDRs) approved by the International Monetary Fund. The vast majority of international payments are denominated in one of these currencies (the US dollar), and the other major currencies account for a small proportion of payment methods.
Compared to international money transfers in these currencies, which typically cost tens of dollars to send thousands of dollars worth of money and are subject to checks by financial institutions, Bitcoin's $2.50 transaction fee is obviously cheap.
Bitcoin’s popularity is increasing international liquidity
However, the amount of these international currency flows far exceeds what Bitcoin can handle. If such payments use Bitcoin, transaction fees will rise, and when they rise to a certain level, the market demand for Bitcoin will fall. Even so, this will not affect the development of Bitcoin, because Bitcoin can fully handle personal payment business.
Bitcoin payments do not have counterparty risk, and the network can provide final settlement of large payments within minutes. Therefore, Bitcoin has the strength to compare with the settlement payments between central banks and large financial institutions. Moreover, Bitcoin payments are cheaper and more verifiable in comparison. The only currency in history without counterparty risk is gold, but the cost of transferring gold is quite high.
There was an interesting brainstorming session about building a global economy around Bitcoin settlement. Bitcoin’s current capacity is to confirm about 350,000 transactions per day. This transaction volume is equivalent to the daily transaction volume of each bank with other banks in a global network system formed by 850 banks. (The number of unique connections in the network is equal to n(n-1)/2, where n is the number of nodes.)
Bitcoin can support an international network of 850 central banks that can perform daily final settlements between each other. The Bitcoin network has two major advantages over the current central bank network: First, the finality of Bitcoin settlement does not rely on any party and does not require any bank to become the de facto arbitrator, making it an ideal choice for a global peer-to-peer network rather than a global centralized order of power.
Second, as a form of currency that cannot be inflated by any member bank, Bitcoin offers a more attractive store of value proposition than fiat currencies, which are created to increase the fiat money supply and finance the government.
Because governments cannot create more Bitcoins, banks around the world will compete with each other in providing physical and digital currency instruments backed by Bitcoin. Without sufficient capital to back it up, the bank's fractional reserve system will be very dangerous.
In the long run, the banks that survive will be the ones that offer financial instruments that are 100% backed by Bitcoin. They will settle between their own clients off-chain, and then conduct final daily settlement between banks on the blockchain .
In a book I’m writing now, available on Amazon, I understand Bitcoin’s primary value proposition as sound money, and I explain how this concept has historically been important far beyond the importance of small transaction costs for consumer payments. Sound monetary systems have always been an integral part of human civilization, and their demise has often accompanied the decline of civilization.
In the 19th century, the modern world was built on stable currencies, with investors providing sufficient funds and not requiring a long time for investment returns. On the other hand, the 20th century's consumption concept of not advocating savings and encouraging timely consumption also caused the legal currency to depreciate continuously.
The Bitcoin community's obsession with consumer payment methods is influenced by the era of fiat currency. Previous generations only knew that they should spend money as quickly as possible before it depreciates, so everyone pursued large-scale consumption. Of course, in a sound monetary system, people will still consume because it is necessary for survival. But because the money saved will appreciate, the future opportunity cost of timely consumption will increase.
As a result, consumption is no longer an uncontrollable thing for people, and people will only buy what they need or some durable goods. Instead of wasting money on non-essentials, they will save money and watch it appreciate, achieving financial freedom.
The number of transactions in the Bitcoin economy would still be as large as it is today, but the settlement of those transactions would not occur on Bitcoin’s distributed ledger because Bitcoin’s immutable and trustless nature would be too valuable for individual consumer payments.
The reality is that buying coffee does not require Bitcoin-level security and trustworthiness; it can be adequately handled on a Bitcoin-denominated layer 2 such as the Lightning Network. Using Bitcoin to buy consumer goods is like flying a Concorde jet down the street to buy groceries: a sledgehammer is a waste of time.
Individual consumer payments are a trivial problem, with modern banking systems already providing various forms of credit and debit. Despite the limitations of current payment schemes, introducing free market competition into the banking and payments sectors (the most rigid sectors of the modern world economy) would boost progress, as banks are controlled by governments that can print money.
If the idea of Bitcoin as a consumer payment method is correct, then increasing transaction fees will be detrimental to mass adoption of the Bitcoin network, so transaction prices will stagnate or fall, and the Bitcoin network's status will plummet. This will become an increasingly untenable argument the day Bitcoin hits $2,000.
Conceived as a settlement layer, the growing popularity of Bitcoin is increasing its international liquidity, allowing it to compete with global reserve currencies for more valuable transactions. As this process continues to develop in the future, higher transaction fees are expected, and the importance of the global Bitcoin settlement network will increase accordingly.
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