Bitcoin's scalability issues

Bitcoin's scalability problems have become very prominent, as transaction fees have exceeded $37, rising from $2 in October 2017. Even though Bitcoin was developed to facilitate microtransactions, it is currently unsuitable for such forms of payments. Consequently, many merchants have recently decided to stop accepting bitcoin payments, including Steam, the online video game store.

Bitcoin was originally introduced as a platform for small casual transactions. One of its big selling points was that payments would be fast, convenient and cheap.  However, companies are now replacing it by other networks as the transaction costs have sharply risen in the last few months.

Bitcoin’s transaction fee went from around $2 in October, to around $37 in December 2017. This was not in line with its vision of providing easier and cheaper transactions. Due to the inflated transaction costs, users are avoiding making smaller transactions. As of January 2018, the average transaction fee is around $26.

Steam discontinues bitcoin

The online video game store, Steam, announced that it won’t continue to accept bitcoin as a form of payment. It mentioned bitcoin’s volatility and high transaction fees as the reason. Steam used Bitpay for processing payments made in bitcoin.

Bitpay provides its users with an application that allows merchants accept bitcoin as payment for goods and services. Bitpay’s client list includes Microsoft, NewEgg, and APMEX. NewEgg is an online retailer, which APMES sells valuable metals online.

One might expect Bitpay to be the reason behind such inconvenience. After all, Bitpay’s service is similar to that provided by credit card processing services. Retailers are often found complaining about credit card services cutting into their profits.

However, James Walpole, Bitpay Communication Manager, explained the true reason behind these pricey transactions. Walpole explained that Bitpay charges only a 1% fee of the total transaction amount, just like any other crypto-payment system. For $10, the transaction fee would cost $0.10, and $9.90 would be sent to the vendor. As the number of transactions increase, the sum becomes greater, but this isn’t the reason behind individual pricey payment.

Bitcoin miners behind higher costs?

Walpole directly accused the bitcoin miners for the inflated costs. A miner’s job is to transcribe data in to digital ledgers, called blockchains. Bitcoin’s blockchain keeps the record of all the transaction. Miners store these transactions in blocks. A block is completed after solving ever-more challenging crypto-puzzles.

A miner charges a mining, or transaction, fee. The rise in transaction fee from $2 in September, to $7 in December to $26 in January, is solely a matter of supply and demand. Bitcoin’s value soared from $10,000 to $20,000 due to a growing number of investors. The demand for miners’ services also increased.

However, supply is also limited. Bitcoin's blockchain can only handle three to seven transactions per second. Around 100 transactions are added onto the blockchain every second. This means that a huge number of transactions are competing to be resolved at any given second.

Crypto users pay the miners a fee, which is not obligatory. This fee encourages miners to record the users’ transactions earlier. Transcription of transactions on the blockchain varies directly with the fee. Transactions can be resolved sooner with higher fee. The sooner a transaction is recorded, the sooner you can deal with the coins you have earned.

Higher fees, faster service!

Accelerating the recording not only makes the crypto-money usable, it is also a very important factor in the volatile market. With such fluctuating prices, it is better to deal with the coins sooner, rather than later. Thus, many users are inclined to pay miners for the advantage of recording their transactions quickly.

Another type of fee that users have to pay is network fee. This also, eventually profits the miners. This fee is not optional, like the mining fee, but payment processors do not make any money off it. When purchasing something using Bitpay and paying through the digital wallet, the buyer pays the merchant not only the cost of the product, but also the network fee. Network charges also vary based on how occupied the network is.