The higher the price, the harder the road to adoption
Every few years, Bitcoin goes on another bull run and prompts a flood of exuberant headlines. Bitcoin is the future of money. You could have been a millionaire, if only you’d bought in earlier. Perhaps in a few years, bitcoin will be worth millions of dollars, and people will be using it every day.
There’s only one problem. No matter how much the price of bitcoin increases, and no matter how many breathless news stories it generates, actual adoption remains stagnant. With all the Lightning Networks and second-layer gimmicks, nobody seems any closer to using bitcoin for anything but speculation. In fact, bitcoin has less adoption now than it did eight years ago.
This hits at a fundamental problem with bitcoin, which tends to be neglected by mainstream reporting. Most “lay” criticisms argue that bitcoin is too volatile, or too hard to use, or that it will inevitably be regulated into oblivion — which could be true, but those aren’t really intrinsic flaws of the bitcoin protocol. But the cost of using Bitcoin is inherent to the protocol, and it doesn’t seem like anyone is interested in fixing it.
Now, when I say that bitcoin is too costly to use, I’m not just talking about the environmental impacts. If you think it’s acceptable for a payments network to use more electricity than Argentina, there’s probably nothing I can say that would change your mind.
When I say that bitcoin is too expensive to use, I’m referring to the literal cost of sending bitcoins to someone else. In order to execute a transaction, you have to pay a miner to add it to the blockchain. Those fees are calculated on a per-byte basis, rather than a percentage — which means that a small bitcoin payment can cost just as much as a larger transaction, or even more. As I’m writing now, the median bitcoin transaction costs $26 dollars — and half of them cost even more. Transaction fees are highly unpredictable, depending on how many other people are trying to send bitcoins at the same time. But it doesn’t matter whether you’re sending a thousand dollars, or ten cents.
This makes bitcoin payments prohibitive for any amount less than a few hundred dollars. In order to be cheaper than credit card fees(2%), your transaction has to be worth more than $1300 dollars. Not to mention the extra transaction fees of moving bitcoins from an exchange to your wallet, or cashing out any BTC you have left over.
Incidentally, those high transaction fees are there by design. By 2017 it was painfully obvious that bitcoin could not handle the kind of throughput needed for a serious payments network, but bitcoin developers refused to raise the blockchain’s transaction limits. The result was a serious split in the bitcoin network, and a currency that is now way too slow or expensive to use. The only practical use for bitcoin now is long-term hoarding and money laundering — for any other application, you’re better off using dollars.
This problem is getting worse, not better. If the price of bitcoin were to reach a hundred thousand dollars this year— and network traffic remained the same — then you’d have to send more than $2600 to beat a credit card transaction. If bitcoin reached a million dollars, that figure would be $26,000.
Paradoxically, the higher the price of bitcoin, the further it is to reach adoption. Five years ago an interested onlooker could easily invest forty or fifty dollars — a trivial sum for most people that would nonetheless allow them to experiment with bitcoin payments without serious risk. At current fees, that would be impossible. Anyone wanting to try bitcoin for the first time would have to start with a thousand-dollar commitment.
One can imagine a future where markets stabilize, and governments provide increased clarity, and bitcoin software becomes more user friendly. But as long as bitcoin is only practical for thousand-dollar transactions, it will always be a currency for the rich.