Strange Bitcoin Transaction Fee Pricing Strategy

Chapter 0 Introduction

The Bitcoin block is full and the transaction fees are getting higher and higher. From an economic perspective, who sets the Bitcoin transfer fees?

Chapter 1: Bitcoin payment function pricing has long been based on penetration pricing

Generally speaking, a merchant provides a product, and the price is usually set by the merchant. For a long time, the pricing of Bitcoin transaction fees can also be roughly regarded as being set by the "merchant". For a long time, the price is 0.0001 BTC per kilobyte of data sent by the user. 0.0001 BTC/kb, this price is very low. If converted into RMB, for a long time, the fee for sending a Bitcoin transaction is basically within 0.1 yuan (based on the Bitcoin price at the time).

1 cent per transaction, and no matter how big or small the transaction amount is, it is basically this price. This is essentially a very large price competitive advantage compared to other payment methods on the market. Credit cards charge a handling fee of 0.3% to 1.2% of the transaction amount. Although Alipay and WeChat Pay are free, they require users to give up their privacy.

This method of entering the market at a very low price has a special term in economics called "penetration pricing" .

The penetration pricing method is to enter the market at a low price, increase the weight of the price-volume scale to the extreme, and win by selling at a low price and high volume.

The reason why Bitcoin has been priced so low is that it needs to be accepted by the market as soon as possible to seize the market. Otherwise, who would like to use this strange payment method?

Goods that can adopt penetration pricing generally need to meet the following conditions:

1. The market is large enough;

2. Consumers are price sensitive;

3. The brand value of the product is very low and it is impossible to establish a brand premium in the minds of consumers;

4. The marginal cost of production is low, and the production cost increases little or even zero for each additional unit produced.

5. There are many competitors. Generally, there are no technical barriers, no user barriers, and no brand patent barriers.

Bitcoin was designed to meet these characteristics from the very beginning as a payment function.

1. The payment market is large enough, especially for small-value and cross-border payments;

2. There are many competitors in the payment market, and banks and third-party payment companies are numerous. Digital currencies are even more numerous, and there are no technical barriers. This has led to low payment fees in the market, and users are very sensitive to fees;

3. It is difficult to establish a brand effect. Users only use it for payment and transfer, and it is difficult to show off.

4. The marginal cost is low, and miners package transactions. The cost of making one transaction is almost the same as making 2,000 transactions.

Therefore, during the eight years of Bitcoin's operation, its pricing has been extremely cheap when it deals with the outside world using its payment function.

Chapter 2 Bitcoin’s payment pricing strategy has become an auction in the past six months

The price of goods is generally set by the merchants, but sometimes the pricing power is given to consumers, which is an auction.

Auction is a very special pricing strategy. Because there is information asymmetry between users, there will be bargaining between users, and merchants can reap the benefits.

In April 2016, the Bitcoin block was full. That is, all transactions available for sale within an average of ten minutes were bought by users. At this time, if you still want to use Bitcoin for payment transfer, you have to compete with other users for bidding.

Bitcoin transaction fees have also been rising since April. Now, a transaction often requires 0.0005 BTC, which is 2.5 yuan in RMB. Sometimes it can even be as high as 5 yuan. This is very high for payment services.

Generally speaking, the supply of goods that can be priced by auction is less than the demand, which is the case with Bitcoin transactions now. However, in the payment market, the supply of such payment services should be far greater than the demand. Banks can have unlimited quantity, and altcoins can also have unlimited quantity. However, the reason why Bitcoin has formed auction pricing is mainly due to the following reasons:

1. Enthusiasts have developed a brand dependence on Bitcoin.

2. Among all altcoins, Bitcoin has the lowest price volatility, the largest market size, and the highest availability.

3. Compared with other non-digital currency payment services, such as banks, Bitcoin has the advantages of not requiring intermediaries and not requiring privacy disclosure.

Therefore, the artificially designed scarcity of Bitcoin payment service has successfully achieved auction pricing, and users are rushing to purchase this payment service.

Chapter 3: Auction pricing for Bitcoin payment services will eventually become unsustainable

Auction pricing for Bitcoin payment services will ultimately lead to Bitcoin's failure. Why?

Auction pricing leads to very poor quality of payment services. An obvious flaw is that the confirmation time cannot be accurately estimated. People who use Bitcoin will find that they cannot accurately predict how long it will take to complete the payment. This has only happened in the past six months during the eight-year operation of Bitcoin. In the past, it took an average of ten minutes to get confirmation. But now users are competing in auctions to obtain payment services, but information asymmetry means that users cannot accurately estimate how much handling fee they have to pay to get the confirmation of the next first block. This payment service is very unsatisfactory. If a product cannot provide users with an accurate expectation, it will not be recognized by many users unless the users end up with a surprise.

To maintain the auction price, the 1M block will not be expanded any more, and payment services will eventually become scarce. Only 3 transactions can be confirmed in one second, no more. In other words, if there are more user demands, they cannot be met. For users, this means that Bitcoin is flawed as a payment function, and the liquidity of Bitcoin in the hands of users is questionable. If there is a period of time when the Bitcoin network generates more than 3 transactions per second on the chain, it means that there must be payments being held up during this period of time. For these users, their transaction services cannot be met, and their coins are useless during this period of time.

Auction pricing leads to high transaction fees, which is essentially a depreciation of the value of Bitcoin. Originally, I only needed 0.0001 BTC to pay for one coin, which means that the effective coin was 0.9999 BTC, but now there is only 0.9995 BTC left. The depreciation rate has increased from 1 in 10,000 to 5 in 10,000.

The above are all for users. Using auction pricing method will cause great harm to users and will ultimately damage the brand premium of Bitcoin.

What about the merchants - the miners?

Miners are also hurt by this auction pricing.

The minimum wage law is ostensibly to protect workers, but in reality it is hurting those who originally had poor labor capacity. Originally, those with poor labor capacity could sell their labor at a price lower than the "minimum wage", but now the minimum wage law prohibits them from selling, and the result is that they have no choice but to become unemployed.

Similarly, the maximum wage law seems to protect capitalists, such as the maximum transfer fee for players in European football. But in fact, it hurts capitalists to buy higher-value labor. Capitalists can hire employees with higher production capacity at a higher price, but because the maximum wage law limits their bids, such employees start their own businesses or find jobs in other fields. In real society, we can also find that all maximum wage laws, including UEFA and the US CEO maximum wage law, cannot be truly enforced.

Miners now have to use auction pricing to sell their own packaged transaction services, which is essentially a combination of the "minimum wage" bill and the "maximum wage" bill. For users, a large number of users who could only afford 0.0001 BTC handling fees have disappeared because of the auction pricing method , which means that Bitcoin's micropayment function has been lost. As for the miners' own service capabilities, they were originally capable of making more transactions in the same amount of time, but because of the restrictions of the "maximum service quantity bill", they can only make three transactions per second. This is self-castration.

Another factor is the competitive market. For example, if the government stipulates that KFC hamburgers cannot be sold for less than 100 yuan each, but does not make such a rule for McDonald's, then the outcome will definitely be KFC's bankruptcy. Now everyone has a rule that Bitcoin can only make three transactions per second, but does not make such a rule for Ethereum, which gives Ethereum an opportunity. In the end, Bitcoin miners will fail in the competition like KFC.

Some people say there will be lightning networks and side chains. Unfortunately, for miners, lightning networks and side chains are the same kind of competitors as Ethereum, because they both provide payment services but do not provide miners with handling fees.

Chapter 4 Conclusion

It's time to guide the block to be bigger, but it won't get pregnant if it's bigger.