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updated: 10/7/2017 8:12 AM

Rising fees have bitcoin users rethinking practicality

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  • A twenty-five bitcoin. When bitcoin debuted in 2009, it was hailed as a technology that would revolutionize the world of finance by making micro-payments practicable. But now many companies hoping to do commerce via bitcoin are finding the fees prohibitive.

    A twenty-five bitcoin. When bitcoin debuted in 2009, it was hailed as a technology that would revolutionize the world of finance by making micro-payments practicable. But now many companies hoping to do commerce via bitcoin are finding the fees prohibitive.
    Tomohiro Ohsumi/Bloomberg File Photo

 
 

Ryan Charles recently switched his business, the social platform Yours Inc., from using bitcoin -- simply because he couldn't afford it.

Fees for sending money over the distributed-ledger network have risen nearly 19-fold, from 13 cents per average transaction in the second quarter of 2016 to $2.40 in the same quarter of this year, according to researcher CoinDesk. While they've moderated somewhat since, the fees still undermine the San Francisco-based company's business model, which is built around writers receiving small payments from readers of their posts.

"Bitcoin is now in a situation where the fees are very high and are likely to continue to increase, so it's not even competitive with PayPal or Western Union in most cases," Charles said in a phone interview.

When bitcoin debuted in 2009 it was hailed as a technology that would revolutionize the world of finance by making micro-payments practicable, and international money transfers cheaper than Western Union. In some cases, particularly in low-value transactions, fees to run payments over the blockchain technology based network can actually be higher.

The fees go to so-called miners, whose computers run the software that makes the network tick. Miners didn't suddenly raise prices. The bitcoin blockchain is a supply-and-demand-driven system. When there's lots of demand, users have to pay higher prices for transactions to post fast. They can pay lower fees, but then the payments will get a low priority, and postings could take days. Most consumers don't even know about the low-cost option: They simply pay fees imposed by what are known as wallet companies that facilitate transactions. And fees have been spiking often.

That's making bitcoin impracticable for many people. Nearly 60 percent of the world's bitcoin owners hold less than $4 at current prices, according to BitInfoCharts. At the recent average of $2.46 per transaction on the bitcoin blockchain, the fees would swallow most of the funds. On Aug. 22, the average transaction fee was $8.90, according to Lucas Nuzzi, senior analyst at Digital Asset Research.

For many companies hoping to do commerce via bitcoin, the fees are prohibitive, especially in emerging economies like India and Vietnam, where consumers often earn a few dollars a day. Even U.S. residents can feel the burn. It can cost as much as $15 to send $25 from the U.S. to a bank account in the U.K. via bitcoin, or three times as much as using Western Union, Nuzzi said.

"It's very cumbersome and complicated," said Khalid Fellahi, head of Western Union Digital in San Francisco. "We haven't seen that today being an alternative to what we do."

To send the $25 from the U.S., Nuzzi used a credit card to buy an equivalent amount of bitcoin on exchange Coinbase Inc., which charged a 3.99-percent fee this month. Then he paid a bitcoin network fee of $1.34 to send the payment to the U.K. While converting bitcoin to pounds was free on the exchange Coinfloor, Nuzzi had to pay $13.56 to place the money in a U.K. bank account. He ended up paying $15.90 to get the payment through.

Granted, some users don't convert to a fiat currency, and transact in bitcoin directly. But even those users would pay fees to miners.

"Bitcoin cannot be used properly for commerce when a transaction costs more than $2," said Shaun Chong, lead developer of mining community Bitcoin.com Pool, which makes between 10 percent and 30 percent more in revenue now that the fees are higher.

"If the fees were lower, the bitcoin price would be even higher because bitcoin would be more usable," Chong said, adding that in its current state, the network is "broken."

There are several reasons why network fees are so high. Many startups have been requiring investors to pay in bitcoin for Initial Coin Offerings. Since those were often only open for a limited period of time, investors sped up money transfers to avoid missing out, pushing costs higher, said Nuzzi.

What's more, as bitcoin's profile rose, the network often got overloaded. With demand high, and supply short, transaction prices went up.

Some of the fees may decline in time. Developers are working on different ways of expanding the network's capacity, with one major fix implemented in late August, and another due in a few months.

But bitcoin developers remain split over how to improve capacity. Already, some of them decided to create and run a separate bitcoin-like digital ledger called bitcoin cash earlier this year. And another split off could be coming in November. Even if the most promising solution, called Lightning Network, is implemented, fees could remain high as demand increases, said Charles. That's why he switched to bitcoin cash, which charges lower fees.

"We see bitcoin losing market share in comparison to other currencies if more events like that spike network fees," Nuzzi said. There are around 1,000 digital currencies and nearly all of them charge lower transaction fees than bitcoin right now. So some entrepreneurs and users are moving to litecoin, bitcoin cash or ethereum to find better prices.

"Bitcoin has a lot of value in terms of moving large amounts of value using digital currency," said Jeremy Allaire, chief executive officer of cryptocurrency exchange operator Circle Internet Financial. "The fees don't matter when you are dealing with larger transactions. If you are using it for a $25 transaction -- then yeah, the fees would be too much."

As transactions get more expensive, perceptions of what bitcoin is are changing, too. Because there will only ever be 21 million bitcoin issued, it's considered to be a scarce resource that investors can park money in, hoping for appreciation. Already, bitcoin's price has nearly quadrupled this year, despite pressure from Chinese regulators.

"It's forced bitcoin into moving away from being a cheap payment system to being a store of value like digital gold," said Anthony Di Iorio, founder of digital wallet provider Jaxx.

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