Bitcoin transaction fees and gold transaction costs

Chapter 0 Introduction

Many people regard Bitcoin as a stored-value currency, believing that Bitcoin can have a stored-value function like gold, and that they can accept even the highest handling fees. This is completely wrong.

Chapter 1 The Issuance of Bitcoin and Gold and the Corresponding Economies

Bitcoin has an upper limit of 21 million BTC, and less than 25% has not been issued yet. Its issuance rate is very slow, which is equivalent to a very low inflation rate. In other words, the seigniorage is very low.

Gold also has an upper limit, there is only so much on the earth, and a little bit is minted every day. This can also be understood as a very low inflation rate, or a very low seigniorage.

The transaction cost of gold is very high. In China, ordinary people can only buy and sell gold from banks or their agencies. There are not only transaction fees, but also a special repurchase fee. If you buy it in the form of jewelry, you have to add various disguised costs. It is impossible to estimate how high it is. We can understand this as the "consumption tax" on gold is very high.

The transaction costs of Bitcoin are very low compared to gold, but are gradually rising.

The GDP corresponding to gold is the world's GDP. After thousands of years of use, almost everyone accepts gold and thinks that gold is a precious metal that can store value . Gold does not need to develop a wider audience to increase the corresponding economy. There is no room for development, right?

Bitcoin is different. The GDP corresponding to Bitcoin is very small and very fragile. People may abandon Bitcoin and use other transaction media at any time. Just like last year, the Bitcoin industry lost several large companies, such as Cirle.

Chapter 2 Scalability of Bitcoin and Gold

The more important difference is that gold is accepted by almost all human beings, and after thousands of years of development, gold trading has developed a large number of financial derivatives, and has long gotten rid of the old-fashioned method of moving physical gold for trading. To put it in a more scientific way, the liquidity of gold is no longer limited by its physical transportation costs. To put it further , the transaction cost of gold has actually been reduced through the innovation of financial derivatives. If gold is bought and sold directly, its transportation costs, color identification costs, and wear and tear will make gold completely incompatible with today's economy.

In contrast, most Bitcoin enthusiasts only believe in on-chain transactions, and only believe in onchain transactions with at least one confirmation, and some even require 6 confirmations. Any other financial innovations, including offchain wallets, lightning networks, payment channels, sidechains, ETFs, etc., have not yet been widely accepted by Bitcoin enthusiasts. Let alone the fact that technologies such as lightning networks and sidechains are not yet mature, even mature offchain wallets are not recognized by everyone. Some offchain wallets offer an annualized interest rate of 8%, and even once exceeded 15%. After several years of operation, they only store tens of thousands of bitcoins, less than one percent of the total amount of bitcoins. In contrast, almost all gold exists in the form of financial derivatives.

The popularity and promotion of Bitcoin, or its liquidity, currently completely depends on on-chain transactions, and most of Bitcoin’s financial derivatives have not yet been accepted. Not to mention derivatives, even Bitcoin itself has not yet been widely accepted.

Most people who own gold now have never touched real gold. They have only gold in the form of financial derivatives, such as paper gold, gold ETFs, etc. But what about Bitcoin? Not to mention that the total number of Bitcoin users worldwide is only in the tens of millions. Even among these tens of millions, no one is willing to accept a Bitcoin derivative. If you don’t have access to UTXO, you don’t have Bitcoin.

From another perspective , gold has very high scalability, and a large number of financial derivatives can be created based on gold, but Bitcoin has very poor scalability. Except for on-chain transactions, other financial derivatives are still in their infancy.

Chapter 3 The transaction cost of gold has been relatively low

The transaction costs of Bitcoin on the chain are increasing, but the transaction costs of gold are actually decreasing. Humans are using financial derivatives to reduce the transaction costs of gold. The relative decrease here refers to the transaction costs relative to the economic volume corresponding to gold.

Therefore, in essence, for gold, humans are not ignoring its transaction costs and trying to use its function as a store of value. Instead, everyone is working hard to reduce the transaction costs of gold through financial derivatives.

It can be speculated that the history of human use of gold has actually been trying to find ways to reduce its transaction costs. From the early direct weighing transactions, to the casting of gold into standardized ingots, to the issuance of silver bills by banks, to paper gold and gold ETF funds in modern finance... Humans have been trying to reduce the loss of gold in the transaction process, reduce the cost of identifying the fineness, and reduce the transportation cost. Reducing the transaction cost of gold has been the direction that humans have been working towards for thousands of years.

Not to mention gold, reducing market transaction costs is the direction of evolution of human social behavior, and this is also the inevitable result of the free market.

It is an anti-human and anti-market argument to say that the development of Bitcoin should allow miners to charge higher (single) transaction fees.

So we cannot say that Bitcoin can ignore transaction costs like gold and fulfill its function of storing value. This is wrong. Not to mention that the acceptance of Bitcoin, the corresponding economy, and scalability are far different from gold.

But someone will definitely ask, how can we ensure that miners are motivated to mine?

Chapter 4: Marginal costs close to zero guarantee mining benefits

Maximizing the value of Bitcoin requires network effects and a large number of users. Bitcoin needs attention and consensus. We need to attract more user transactions on the blockchain. We need to maintain low transaction fees to maintain the continued growth of the number of users.

When miners cannot obtain enough block rewards, their interests can only be guaranteed by increasing the number of transaction fees and the price of Bitcoin. You cannot limit the number of transactions and expect transaction fees to rise. Limiting the number of transactions will only kill the network effect of Bitcoin and thus kill Bitcoin.

In the 1980s, my family made a phone call to my dad because he had a car accident. The call cost 10 yuan and the call was hung up in less than 2 minutes. Now, the cost of making phone calls is so cheap. But the profits of telephone operators are so high that telephone operators have built more signal towers and bought more routers.

Miners now, you say you want to increase the mining fee to ensure the operation of computing power, and turn the Bitcoin network into a clearing network to increase transaction fees. Isn't this a joke? You are stupid! Our Internet access fees have been declining for more than 20 years, telephone charges have been declining, and electricity charges have been declining. But all the services we get are getting better and better, and operators are making more money. This is the network effect. Students, this is the huge profit brought by the marginal cost close to zero.

Chapter 5 Conclusion

In order for Bitcoin to have a wider economy, or a higher price, transaction costs, or miner fees, must be reduced.