Bitcoin price (BTC/USD): Transaction fees experience dramatic drop

Bitcoin transaction fees have seen a dramatic decrease over the past couple of months.

Last year, the rapidly growing fees, charged by Bitcoin miners for validating BTC transactions, became a major cause for concern for consumers and businesses alike. Some platforms, such as the online video game store Steam, stopped accepting Bitcoin payments, citing high transaction fees as one of the reasons to do so.

The issue became particularly worrying in December, when the Bitcoin investment craze was at its peak. According to data website Bitinfocharts, the average Bitcoin transaction fee skyrocketed to over $50 in December. While that particular spike lasted only a couple of days the fees remained above $25 for the better part of the month.

However, according to the charts, the situation has changed drastically since mid-January, with BTC fees having experienced a steep decline. The data shows that the average BTC fee is currently hovering around $2, the same level it largely maintained throughout September and October. So what has caused such a dramatic decline?

The simple answer is that the lower fees have been the result of people making fewer transactions than in December, industry website Coindesk says in a recent article. In December, the number of BTC transactions averaged 400,000 per day, compared to around 200,000 a day in February.

 “There is substantially less transaction demand,” BitGo engineer Mike Belshe said, as quoted by Coindesk.

According to Belshe, the decrease in transactions might be the result of some large transaction processors finally implementing a technology called “batching” due to the higher fee prices. The technology allows for many transactions to rolled into one, in order to leave more space on the blockchain.

Several cryptocurrency exchanges, including Coinbase, have said that they intend to implement the technology. And yesterday, digital currency exchange ShapeShift announced that it was now using batching “to further reduce costs to customers and improve the health of the Bitcoin network”. It added that the batching update allowed it to offer one of the lower miner fees across the industry.

ShapeShift was also one of the first large processors to adopt the Segregated Witness scaling upgrade for Bitcoin. The introduction of SegWit to the Bitcoin blockchain has likely contributed for the lower fees, although it is unclear whether its impact has been significant. For the past several months, SegWit’s share of overall transactions has ranged from 10% to 14%. This may soon change, however, as some of the world’s largest exchanges are adding support for the technology.

Earlier this week, Coinbase announced that it had finish testing SegWit for Bitcoin on its platform and was aiming to roll out the upgrade to all its customers by mid-next week. Meanwhile, Bitfinex revealed that its customers could make Bitcoin deposits and withdrawals from P2SH Segregated Witness addresses.

While SegWit was accepted by the majority of the Bitcoin users, it was opposed by a subset of the community, which insisted that increasing the BTC block size was a better way to improve the network’s scalability. In August they created their own version of Bitcoin called Bitcoin Cash. This version supports block size of up to 8 MB.

Some Bitcoin critics have suggested that the lower fees are the result of people leaving Bitcoin for other alternatives.

“Bitcoin isn’t useful for anything that involves low fees so people are migrating to alternatives. this has the consequence of lowering the fees on bitcoin,” Ryan X. Charles, founder of media start-up Yours, said, as quoted by Coindesk.

Yours is a decentralised content network that uses cryptocurrencies to reward content creators. The start-up initially used Bitcoin, but because of the high miner fees it switched to Litecoin, before finally settling on Bitcoin Cash.

However, even if users are moving away from Bitcoin, they are seemingly not migrating to Bitcoin Cash, at least not in large numbers. Coindesk notes that Bitcoin Cash still has only about 10% the number of transactions bitcoin currently does.

Bitcoin developer Meni Rosenfeld has a different theory. “The main reason for the drop in [bitcoin transaction] fees is not SegWit adoption, and it’s not people moving to [bitcoin cash]. It’s simply that the craze for buying cryptocurrencies in general has calmed down,” Rosenfeld tweeted earlier this week.

He may have a point. The data provided by Bitinfocharts, clearly shows that the fees’ spike to over $50 happened around the time when Bitcoin was posting record trading volumes of over $22 billion a day and just a few days after its price had hit an all-time high around $20,000.  In comparison, Bitcoin’s 24-hour trading volume currently stands at $7.7 billion, while its price hovers just above $10,000.

Other major digital coins, such as Ethereum, Ripple and Litecoin are also experiencing a similar pattern, where their declines in market capitalisation coincide with dramatic drops in transaction fees.