Are Bitcoin’s high transaction fees squeezing out low-value users?

Chapter 0 Introduction

The Bitcoin block has been running at full capacity for more than half a year. In order to get transactions confirmed as soon as possible, the handling fee is sometimes as high as 1MBTC. In particular, the number of unconfirmed transactions in recent days has exceeded 50,000, but the price of Bitcoin has risen by more than 500 yuan in a week. This has led many people to speculate on the causal relationship between the increase in the price of the currency and the increase in handling fees, and even concluded that this is the result of high-value users entering the Bitcoin ecosystem.

Is this really the case? Let me try to analyze it.

Chapter 1: Who are sensitive to fees and who are not

The most widely used application of Bitcoin is as an investment product, or speculative product. Users who invest in Bitcoin simply buy and hold Bitcoin. They just hold Bitcoin as an asset and only need to trade it rarely. The most common way is to store Bitcoin directly in an exchange or entrust funds to ETF/ETN funds. These investors do not care about the transaction fees on the Bitcoin chain , just like the buyers and sellers of gold do not care about the transaction costs. Even if the Bitcoin transaction fee increases tenfold, this type of investor will not care.

Whether small investors are sensitive to transaction fees depends on each individual, and it mainly depends on their level of optimism about the future.

People who use Bitcoin for daily payments are sensitive to transaction fees. Using Bitcoin as a currency is already an important part of the Bitcoin economy. For example, people who shop on Openbazzar have to consider the transaction fee. The transaction fee for credit cards is basically 1%. If the transaction fee for Bitcoin payment exceeds 1%, it will be relatively uncompetitive. In addition, when some Bitcoin financial management or mining pools distribute revenue to users, they may have to issue a large number of transactions every day, and the transaction fee may be a large expense. In the past, Bitcoin was used for small rewards, and many rewards were a few yuan, that is, a few millibits. But if the transaction fee requires 1 millibit, the motivation for rewarding will be reduced. It can be said that the current transaction fee has basically eliminated the small payment function of Bitcoin.

People who develop and integrate blockchain applications on the Bitcoin blockchain are extremely sensitive to Bitcoin. For example, online file timestamping requires the use of Bitcoin transactions to implement intellectual property evidence. There are also some non-monetary applications based on the Bitcoin blockchain, such as asset expression implemented by colored coins. These assets need to be traded, split, merged, earn interest, and re-colored, etc., and it is best to achieve 100% reliability through Bitcoin transactions. This type of application will consume a large number of Bitcoin transactions. If the handling fee is high, their operating costs will be very high.

Bitcoin arbitrageurs are more sensitive to transaction fees, especially cross-platform arbitrageurs, such as arbitrageurs. Because they need more on-chain transfers to transfer coins between different platforms. But as long as the profit is large enough, they can accept higher fees. But they cannot accept high confirmation time, so when the block is very congested, they will even use Litecoin to transfer funds across platforms.

Pure investors and speculators are not sensitive to Bitcoin transaction fees, but those who use Bitcoin for daily payments and application developers on the Bitcoin blockchain are very sensitive to the fees.

In fact, if we look at the total amount of fees paid, everyone is sensitive. It's just that investors pay less frequently, so they can accept higher single fees, while users pay more frequently, so they are unwilling to accept higher single fees. But both are sensitive to the total amount of expenditure.

Chapter 2: Who is sensitive to confirmation time and who is not

Long-term Bitcoin investors are basically not sensitive to confirmation time. Their coins are basically kept in cold wallets. It doesn’t matter if they send coins to cold wallets and there is zero confirmation, because they will be confirmed sooner or later anyway.

In addition, most people are very annoyed by the uncertain confirmation time of using Bitcoin. Just like when I send a sum of money to someone, even if he is not in a hurry to use it, it is still unpleasant to see that the money is not received for a long time.

For those who develop applications on the Bitcoin blockchain, especially those who cannot accept the security risks of zero confirmation, the requirements for confirmation time are even more precise.

Chapter 3 Which groups of people are high-value users and which groups of people are low-value users

Since some people are sensitive to Bitcoin transaction fees and some are not, can we distinguish the value of users by how much they are willing to pay in fees? The value here is mainly evaluated based on the contribution to the price of the currency, because this is what most people care about.

To say who is willing to pay more in fees, we can divide it into the total amount they are willing to pay and the single amount they are willing to pay.

If we look at the total amount of transaction fees paid, there is no doubt that people who are not sensitive to transaction fees pay the least. Because they rarely conduct on-chain transactions, they can accept a large transaction fee for a single transaction, but their contribution value is only in these few single transactions. People who participate in Bitcoin ETF fund investment even contribute almost nothing to transaction fees. The contribution of transaction fees mainly comes from people who use a large number of on-chain transactions, such as people who use Bitcoin as daily payment, and people who distribute mining income in mining pools.

Should we evaluate the value of users based on their contribution to the total transaction fee or the transaction fee amount of a single transaction? Which group contributes more to the price of the currency?

We have no way of knowing, and this kind of value judgment is a very strange proposition. The impact on prices itself is very complex. This is the result of multi-party game in the free market, and you cannot measure the result from a certain dimension.

We have to honestly admit that it is impossible to evaluate the value of users' impact on the price of the currency from the dimension of transaction fees, and we cannot find a reliable answer.

In other words, we cannot distinguish the contribution of different groups of people to the price of a currency by the amount of transaction fees they are willing to pay (either for a single transaction or for the total amount).

Chapter 4: High transaction fees squeeze out the value of Bitcoin itself

High transaction fees will squeeze out users who are sensitive to transaction fees, including users who make small payments, daily payments, and develop applications on the Bitcoin blockchain. This is first of all a squeeze on the function of Bitcoin. Bitcoin was originally used for small payments, but once the transaction fees increase, this function is lost.

Why do you say that it is not the users who are being squeezed out, but the functions of Bitcoin that are being squeezed out? Because there are other products in the market for users to choose from. Users actively choose to use other products, not to be abandoned by you. If there is a breakup, it is the users who dumped the Bitcoins. It is shameless to say that Bitcoin dumped the users. Just like the Bitcoin arbitrageurs who use Litecoin to transfer funds between platforms, this is a perfect example.

For investors, whether Bitcoin is worth investing in depends on whether it is undervalued by the market. As long as it is undervalued, it can attract investors. For users, whether to use Bitcoin depends on its functions. The level of transaction fees will greatly affect the function of Bitcoin, thereby excluding users. However, the impact of this function on the price of the currency does not seem to be as direct as the impact of investors' funds on the price of the currency. Perhaps this is the reason why many people mistakenly believe that investors are high-quality users and users are low-quality users, but this is wrong.

Chapter 5 Conclusion

The value of a user cannot be evaluated by the transaction fee. If you really want to evaluate, please use the total fee paid, rather than the size of a single transaction.